68 Pages Posted: 10 Sep 2018 Last revised: 28 May 2021
Date Written: August 29, 2018
We study the effect of dealer exit on prices and quantities in a model of an over-the-counter (OTC) market featuring a core-periphery network with bilateral trading costs. The model is calibrated using regulatory data on the entire U.S. credit default swap (CDS) market between 2010-2013. Prices depend crucially on the risk-bearing capacity of core dealers, yet unlike standard models featuring a dealer sector, we allow for heterogeneity in dealer risk-bearing capacity. This heterogeneity is quantitatively important. Depending on how well dealers share risk, the exit of a single dealer can cause credit spreads to rise by 8 to 24%.
Keywords: OTC markets, networks, intermediaries, dealers, systemic risk, credit default swaps
JEL Classification: G01, G19, L14
Suggested Citation: Suggested Citation