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Dealer intermediation between markets
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Dunne, Peter G., Hau, Harald and Moore, Michael J. (2015) Dealer intermediation between markets. Journal of the European Economic Association, 13 (5). pp. 770-804. doi:10.1111/jeea.12118 ISSN 1542-4766.
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Official URL: http://dx.doi.org/10.1111/jeea.12118
Abstract
We develop a dynamic model of dealer intermediation between a monopolistic customer–dealer market and a competitive interdealer limit order market. Dealers face inventory constraints and adverse selection. We characterize the optimal quote setting and inventory management behavior for both markets in closed form and reveal how price setting in one market segment influences quote behavior in the other. The framework is used to explore market stability issues of the two-tier market structure and delivers testable predictions about how the dispersion of retail prices is related to the state of the interdealer limit order book. Data from the European sovereign bond market is used to test for inventory related retail price dispersion.
Item Type: | Journal Article | ||||||||
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Subjects: | H Social Sciences > HC Economic History and Conditions | ||||||||
Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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Library of Congress Subject Headings (LCSH): | Intermediation (Finance) -- Europe, Commodity exchanges -- Econometric models, Brokers -- Econometric models, Over-the-counter markets | ||||||||
Journal or Publication Title: | Journal of the European Economic Association | ||||||||
Publisher: | John Wiley & Sons Ltd. | ||||||||
ISSN: | 1542-4766 | ||||||||
Official Date: | October 2015 | ||||||||
Dates: |
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Volume: | 13 | ||||||||
Number: | 5 | ||||||||
Page Range: | pp. 770-804 | ||||||||
DOI: | 10.1111/jeea.12118 | ||||||||
Status: | Peer Reviewed | ||||||||
Publication Status: | Published | ||||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||||
Funder: | Economic and Social Research Council (Great Britain) (ESRC) | ||||||||
Grant number: | ES/H041524/1 |
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