Interdealer Price Dispersion

125 Pages Posted: 17 Oct 2022 Last revised: 16 Feb 2024

See all articles by Andrea L. Eisfeldt

Andrea L. Eisfeldt

UCLA Anderson School of Management

Bernard Herskovic

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER)

Shuo Liu

Tsinghua University - School of Economics & Management

Date Written: October 5, 2022

Abstract

Intermediation capacity varies across dealers, and as a result, misallocation of credit risk reduces the risk-bearing capacity of the dealer sector and increases effective market-level risk aversion. When the efficient reallocation of credit risk within the dealer sector is impaired, interdealer price dispersion increases. Empirically, when interdealer price dispersion increases, bond prices decrease. Interdealer price dispersion explains a substantial portion of bond yield spread changes, the cross-section of bond returns, and the changes in the basis between bond spread and fair-value spreads. We conclude interdealer frictions reduce the risk-bearing capacity of intermediaries and are crucial for intermediary bond pricing.

Keywords: OTC markets, intermediaries, dealers, corporate bonds, interdealer price dispersion

JEL Classification: G12

Suggested Citation

Eisfeldt, Andrea L. and Herskovic, Bernard and Liu, Shuo, Interdealer Price Dispersion (October 5, 2022). Available at SSRN: https://ssrn.com/abstract=4238166 or http://dx.doi.org/10.2139/ssrn.4238166

Andrea L. Eisfeldt

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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

Bernard Herskovic (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

Los Angeles, CA 90095-1481
United States

HOME PAGE: http://bernardherskovic.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Shuo Liu

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

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