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Interdealer Price Dispersion and Intermediary Capacity

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  • Andrea L. Eisfeldt
  • Bernard Herskovic
  • Shuo Liu

Abstract

Intermediation capacity varies across dealers, and as a result, misallocation of credit risk reduces the risk-bearing capacity of the dealer sector and increases effective market-level risk aversion. When the efficient reallocation of credit risk within the dealer sector is impaired, interdealer price dispersion increases. Empirically, when interdealer price dispersion increases, bond prices decrease. Interdealer price dispersion explains a substantial portion of bond yield spread changes, the cross-section of bond returns, and the changes in the basis between bond spread and fair-value spreads. We conclude interdealer frictions reduce the risk-bearing capacity of intermediaries and are crucial for intermediary bond pricing.

Suggested Citation

  • Andrea L. Eisfeldt & Bernard Herskovic & Shuo Liu, 2024. "Interdealer Price Dispersion and Intermediary Capacity," NBER Working Papers 32998, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32998
    Note: AP
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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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