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Discussion Paper Details

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Title: Inventory Management, Dealers' Connections, and Prices in OTC Markets

Author(s): Jean-Edouard Colliard, Thierry Foucault and Peter Hoffmann

Publication Date: July 2018

Keyword(s): interdealer trading, Inventory management and OTC markets

Programme Area(s): Financial Economics

Abstract: We propose a new model of interdealer trading. Dealers trade together to reduce their inventory holding costs. Core dealers share these costs efficiently and provide liquidity to peripheral dealers, who have heterogeneous access to core dealers. We derive predictions about the effects of peripheral dealers' connectedness to core dealers and the allocation of aggregate inventories between core and peripheral dealers on the distribution of interdealer prices, the efficiency of interdealer trades, and trading costs for the dealers' clients. For instance, the dispersion of interdealer prices is higher when fewer peripheral dealers are connected to core dealers or when their aggregate inventory is higher.

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Bibliographic Reference

Colliard, J, Foucault, T and Hoffmann, P. 2018. 'Inventory Management, Dealers' Connections, and Prices in OTC Markets'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13093