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Dealer inventory, pricing, and liquidity in the OTC derivatives markets: Evidence from index CDSs

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  • Wang, Xinjie
  • Zhong, Zhaodong (Ken)

Abstract

We examine the effects of dealers’ inventories on the pricing and liquidity of OTC derivatives markets. Using position and pricing data on credit default swap (CDS) indices, we document that the change in index CDS spreads is negatively associated with the change in dealers’ net long positions. The effect of dealer inventory on CDS spreads is stronger after the Volcker Rule is implemented in the United States. Furthermore, the divergence between index CDS spreads and their theoretical values (index basis) is also negatively associated with dealers’ net long positions. Finally, bid-ask spreads and the number of dealers increase when the inventory position of dealers is larger.

Suggested Citation

  • Wang, Xinjie & Zhong, Zhaodong (Ken), 2022. "Dealer inventory, pricing, and liquidity in the OTC derivatives markets: Evidence from index CDSs," Journal of Financial Markets, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:finmar:v:57:y:2022:i:c:s1386418120300860
    DOI: 10.1016/j.finmar.2020.100617
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    More about this item

    Keywords

    Credit default swap; Dealer inventory; Intermediary asset pricing; Index basis;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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