Risk Concentration and Interconnectedness in OTC Markets

45 Pages Posted: 22 Mar 2021

See all articles by Briana Chang

Briana Chang

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Shengxing Zhang

London School of Economics (LSE) - Department of Economics

Date Written: March 19, 2021

Abstract

We analyze the impact of a regulatory reform in a novel framework that jointly determines banks’ bilateral networks and platform access. In our model, banks use their bilateral connections to obtain indirect access to the platform, which saves direct entry costs but results in risk concentration. This trade-off leads to a unique market structure, which is generally asymmetric with multiple layers even if all banks are ex ante homogeneous. Policies that increase balance sheet costs relative to entry costs could result in a more symmetric market structure but have ambiguous effects on transaction costs. Our results underscore that policies aiming to achieve all-to-all trading, reduce risk concentration, or lower transaction costs can be counterproductive.

Keywords: Trading Network, Over-the-Counter Market, Reforms

JEL Classification: C70, G1, G20

Suggested Citation

Chang, Briana and Zhang, Shengxing, Risk Concentration and Interconnectedness in OTC Markets (March 19, 2021). Available at SSRN: https://ssrn.com/abstract=3808072 or http://dx.doi.org/10.2139/ssrn.3808072

Briana Chang (Contact Author)

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States

Shengxing Zhang

London School of Economics (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

HOME PAGE: http://https://sites.google.com/site/oo7zsx/

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

Paper statistics

Downloads
45
Abstract Views
184
PlumX Metrics