Dealer Networks and the Cost of Immediacy

47 Pages Posted: 19 Feb 2021

See all articles by Jens Dick-Nielsen

Jens Dick-Nielsen

Copenhagen Business School - Department of Finance

Thomas K. Poulsen

BI Norwegian Business School

Obaidur Rehman

BI Norwegian Business School

Date Written: December 21, 2020

Abstract

We show that uninformed corporate bond index trackers pay lower transaction costs when they request immediacy from more central dealers in the network. This centrality discount supports recent network models in which core dealers have a comparative advantage in carrying inventory. Core dealers provide more immediacy and revert deviations from their desired inventory faster. When dealers trade with other dealers, we find a centrality premium consistent with core dealers exploiting their comparative advantage to extract more surplus when bargaining with peripheral dealers. Using trades around index exclusions rule out alternative explanations based on adverse selection, customer bargaining power, and customer clienteles.

Keywords: Dealer network, dealer inventory, search frictions, transaction costs

JEL Classification: G12

Suggested Citation

Dick-Nielsen, Jens and Poulsen, Thomas K. and Rehman, Obaidur, Dealer Networks and the Cost of Immediacy (December 21, 2020). Available at SSRN: https://ssrn.com/abstract=3752881 or http://dx.doi.org/10.2139/ssrn.3752881

Jens Dick-Nielsen

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Thomas K. Poulsen (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Obaidur Rehman

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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