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  • February 2023
  • Article
  • Review of Financial Studies

OTC Intermediaries

By: Andrea L. Eisfeldt, Bernard Herskovic, Sriram Rajan and Emil Siriwardane
  • Format:Print
  • | Pages:63
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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 36, no. 2 (February 2023): 615–677.
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About The Author

Emil N. Siriwardane

Finance
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