Inventory Management, Dealers’ Connections, and Prices in OTC Markets

68 Pages Posted: 5 Mar 2021

See all articles by Jean-Edouard Colliard

Jean-Edouard Colliard

HEC Paris - Finance Department

Thierry Foucault

HEC Paris - Finance Department

Peter Hoffmann

European Central Bank (ECB) - Directorate General Research

Date Written: February, 2021

Abstract

We propose a new model of trading in OTC markets. Dealers accumulate inventories by trading with end-investors and trade among each other to reduce their inventory holding costs. Core dealers use a more efficient trading technology than peripheral dealers, who are heterogeneously connected to core dealers and trade with each other bilaterally. Connectedness affects prices and allocations if and only if the peripheral dealers’ aggregate inventory position differs from zero. Price dispersion increases in the size of this position. The model generates new predictions about the effects of dealers' connectedness and dealers' aggregate inventories on prices.

JEL Classification: G10, G12, G19

Suggested Citation

Colliard, Jean-Edouard and Foucault, Thierry and Hoffmann, Peter, Inventory Management, Dealers’ Connections, and Prices in OTC Markets (February, 2021). ECB Working Paper No. 2021/2529, Available at SSRN: https://ssrn.com/abstract=3797149

Jean-Edouard Colliard (Contact Author)

HEC Paris - Finance Department ( email )

France

Thierry Foucault

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
(33)139679569 (Phone)
(33)139677085 (Fax)

HOME PAGE: http://thierryfoucault.com/

Peter Hoffmann

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

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