Dealer Networks and the Cost of Immediacy

79 Pages Posted: 19 Feb 2021 Last revised: 4 Jan 2023

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: January 4, 2023

Abstract

We examine how dealer network position affects transaction costs when dealers provide immediacy by taking bonds into inventory. Dealers with central network positions provide more immediacy and revert deviations from their desired inventory faster than peripheral dealers do. The cost of immediacy decreases with centrality for customer trades (centrality discount) and increases with centrality for interdealer trades (centrality premium). These findings support recent network models in which central dealers have a comparative advantage in managing inventory. We isolate the inventory management channel and avoid confounding effects from adverse selection and heterogeneous customer clienteles by using trades around bond index exclusions.

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 (January 4, 2023). Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC, 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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