Article
Journal of Financial Economics

The Value of Trading Relations in Turbulent Times

By: Marco Di Maggio, Amir Kermani and Zhaogang Song

Format:Print

Abstract

This paper investigates how dealers’ trading relations shape their trading behavior in the corporate bond market. Dealers charge lower spreads to dealers with whom they have the strongest ties and more so during periods of market turmoil. Systemically important dealers exploit their connections at the expense of peripheral dealers as well as clients, charging higher markups than to other core dealers. Also, intermediation chains lengthened by 20% following the collapse of a flagship dealer in 2008 and even more for institutions strongly connected to this dealer. Finally, dealers drastically reduced their inventory during the crisis.

Keywords

OTC Markets; Network; Corporate Bonds; Crisis; Intermediation Chains; Leaning Against The Wind; Networks; Bonds; Behavior; Financial Crisis

Citation

Di Maggio, Marco, Amir Kermani, and Zhaogang Song. "The Value of Trading Relations in Turbulent Times." Journal of Financial Economics 124, no. 2 (May 2017): 266–284.