Competing with Inventory in Dealership Markets
67 Pages Posted: 13 Aug 2021 Last revised: 20 Aug 2021
Date Written: August 20, 2021
Existing literature on dealer liquidity provision and inventory management has focused on dealer inventory cost. I uncover a new inventory benefit channel: dealers strategically build inventory in order to compete for market share. The inventory benefit reduces the effective cost of dealer inventory holding, thereby lowering the price of liquidity provision. Using the TRACE data for the U.S. corporate bonds, I show that, excluding the 2008 crisis, the inventory benefit per trade is on average 8.4 basis points larger than the inventory cost. The result is reversed during the crisis, when dealers suffer significantly higher inventory cost.
Keywords: inventory benefit, trade competition, liquidity provision, inventory management, inventory cost
JEL Classification: G1, G12, G24, D43
Suggested Citation: Suggested Citation