Event Details

Finance Seminar

Abstract: Bid-Ask Spreads and Over-the-Counter Interdealer Markets: Core and Peripheral Dealers

This paper studies customer bid-ask spreads charged by heterogeneous dealers with different exposures to search friction on an over-the-counter market. Recent empirical studies document significant heterogeneity of dealers on these markets and characterize the interdealer market as having a core-peripheral structure. The observed heterogeneity of dealers is often associated with differences in transaction costs faced by customers (Li and Schuerhoff, 2012). We present an equilibrium search model with heterogeneous dealers trading a representative asset and find that lower bid-ask spreads charged by peripheral dealers are consistent with higher exposure of these dealers to the underlying search friction and customers shopping for better deals. We also note that interdealer activity observed in the data is consistent with dealers being in different liquidity states and thus having different intrinsic (or "buy and hold") valuations for the asset. Conversely, the absence of shopping by customers results in much lower differences in average bid-ask spreads across dealers, but higher volatility of quotes.

Contact Information:

pconley@andrew.cmu.edu