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Inventory Management, Dealers' Connections, and Prices in Over‐the‐Counter Markets

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  • JEAN‐EDOUARD COLLIARD
  • THIERRY FOUCAULT
  • PETER HOFFMANN

Abstract

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.

Suggested Citation

  • Jean‐Edouard Colliard & Thierry Foucault & Peter Hoffmann, 2021. "Inventory Management, Dealers' Connections, and Prices in Over‐the‐Counter Markets," Journal of Finance, American Finance Association, vol. 76(5), pages 2199-2247, October.
    • Handle: RePEc:bla:jfinan:v:76:y:2021:i:5:p:2199-2247
    DOI: 10.1111/jofi.13034
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    References listed on IDEAS

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    2. Yu An & Zeyu Zheng, 2023. "Immediacy Provision and Matchmaking," Management Science, INFORMS, vol. 69(2), pages 1245-1263, February.
    3. Eisenschmidt, Jens & Ma, Yiming & Zhang, Anthony Lee, 2024. "Monetary policy transmission in segmented markets," Journal of Financial Economics, Elsevier, vol. 151(C).
    4. Pinter, Gabor & Uslu, Semih, 2022. "Comparing search and intermediation frictions across markets," Bank of England working papers 974, Bank of England.
    5. Kamate, Vidya & Kumar, Abhishek, 2024. "Dealer networks, client sophistication and pricing in OTC derivatives," Journal of International Money and Finance, Elsevier, vol. 140(C).
    6. Florian Nagler & Giorgio Ottonello, 2022. "Inventory-Constrained Underwriters and Corporate Bond Offerings [Signalling by underpricing in the IPO market]," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 12(3), pages 639-666.

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