Interdealer Price Dispersion

101 Pages Posted: 17 Oct 2022 Last revised: 31 Jan 2023

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, interdealer price dispersion is a strong determinant of yield spread changes. When interdealer price dispersion is high, bond prices are low. Interdealer price dispersion explains a substantial portion of bond yield spread changes, the cross-section of bond returns, and the basis between yield spread changes and changes in fair-value spreads. We conclude that frictions within the dealer sector reduce the risk-bearing capacity of intermediaries and are thus 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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