Publications
Publications
- Forthcoming
- Review of Financial Studies
OTC Intermediaries
By: Andrea L. Eisfeldt, Bernard Herskovic, Sriram Rajan and Emil Siriwardane
Abstract
We study the effect of dealer exit on prices and quantities in a model of an over-the-counter (OTC) market featuring a core-periphery network with bilateral trading costs. The model is calibrated using regulatory data on the entire U.S. credit default swap (CDS) market between 2010-2013. Prices depend crucially on the risk-bearing capacity of core dealers, yet unlike standard models featuring a dealer sector, we allow for heterogeneity in dealer risk-bearing capacity. This heterogeneity is quantitatively important. Depending on how well dealers share risk, the exit of a single dealer can cause credit spreads to rise by 8 to 24%.
Keywords
OTC Markets; Intermediaries; Dealers; Credit Default Swaps; Risk Sharing; Financial Markets; Networks; Price; Risk and Uncertainty
Citation
Eisfeldt, Andrea L., Bernard Herskovic, Sriram Rajan, and Emil Siriwardane. "OTC Intermediaries." Review of Financial Studies (forthcoming). (Pre-published online September 12, 2022.)