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Inventory Management, Dealers' Connections, and Prices in Over‐the‐Counter Markets
Author(s) -
COLLIARD JEANEDOUARD,
FOUCAULT THIERRY,
HOFFMANN PETER
Publication year - 2021
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.13034
Subject(s) - social connectedness , position (finance) , business , core (optical fiber) , aggregate (composite) , monetary economics , dispersion (optics) , over the counter , commerce , economics , finance , psychology , materials science , physics , optics , composite material , psychotherapist , medicine , pharmacology , medical prescription
We propose a new model of trading in over‐the‐counter markets. Dealers accumulate inventories by trading with end‐investors and trade among each other to reduce their inventory holding costs. Core dealers use a more efficient trading technology than peripheral dealers, who are heterogeneously connected to core dealers and trade with each other bilaterally. Connectedness affects prices and allocations if and only if the peripheral dealers' aggregate inventory position differs from zero. Price dispersion increases in the size of this position. The model generates new predictions about the effects of dealers' connectedness and dealers' aggregate inventories on prices.