Dealer Funding and Market Liquidity

71 Pages Posted: 8 Nov 2018 Last revised: 5 Oct 2020

See all articles by Max Bruche

Max Bruche

Humboldt University of Berlin

John Chi-Fong Kuong

INSEAD - Finance

Date Written: September 30, 2020

Abstract

We consider a model in which dealers intermediate trades between clients and provide immediacy, or, market liquidity. Dealers can exert unobservable effort to improve the chance of intermediating profitably. This moral-hazard friction impairs dealers’ ability to raise external finance and hence to compete aggressively with each other in providing liquidity. To alleviate the financing friction, dealers opt to finance with debt and intermediate in several markets simultaneously. Dealer leverage is therefore endogenous and related to variations in liquidity across otherwise unrelated markets. Our results shed light on the developments of intermediation in bond markets in response to post-crisis bank regulations.

Keywords: dealers, market-making, asset liquidity, moral hazard, regulation

JEL Classification: G23, G24

Suggested Citation

Bruche, Max and Kuong, John Chi-Fong, Dealer Funding and Market Liquidity (September 30, 2020). Available at SSRN: https://ssrn.com/abstract=3281303 or http://dx.doi.org/10.2139/ssrn.3281303

Max Bruche

Humboldt University of Berlin ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

HOME PAGE: http://www.maxbruche.net

John Chi-Fong Kuong (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

HOME PAGE: http://www.johncfkuong.com

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
133
Abstract Views
1,291
rank
259,187
PlumX Metrics