Do Inventories Matter in Dealership Markets? Evidence from the London Stock Exchange

Journal of Finance

Posted: 19 Mar 1998

See all articles by Oliver Hansch

Oliver Hansch

Pennsylvania State University

S. Viswanathan

Duke University - Fuqua School of Business; Duke University - Department of Economics

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

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Abstract

Using London Stock Exchange data, we test the central implication of the canonical model of Ho and Stoll (1983) that relative inventory differences determine dealer behavior. We find that relative inventories explain which dealers obtain large trades and show that movements between best ask, best bid and straddle are highly correlated with both standardized and relative inventory changes. We show that the mean reversion in inventories is highly nonlinear and increasing in inventory levels. We show that a key determinant of variations in inter-dealer trading is inventories and that inter-dealer trading plays an important role in managing large inventory positions.

JEL Classification: G12

Suggested Citation

Hansch, Oliver and Viswanathan, S. and Naik, Narayan Y., Do Inventories Matter in Dealership Markets? Evidence from the London Stock Exchange. Journal of Finance. Available at SSRN: https://ssrn.com/abstract=68568

Oliver Hansch (Contact Author)

Pennsylvania State University ( email )

609C Business Administration Building
University Park, PA 16802
United States

S. Viswanathan

Duke University - Fuqua School of Business ( email )

Durham, NC 27708-0120
United States
919-660-7784 (Phone)
919-684-2818 (Fax)

Duke University - Department of Economics

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

Narayan Y. Naik

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 724 3317 (Fax)

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