Price Dispersion In Otc Markets
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Price Dispersion In Otc Markets
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Author : Rainer Jankowitsch
language : en
Publisher:
Release Date : 2008
Price Dispersion In Otc Markets written by Rainer Jankowitsch and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2008 with categories.
In this paper, we model price dispersion effects in over-the-counter (OTC) markets to show that in the presence of inventory risk for dealers and search costs for investors, traded prices may deviate from the expected market valuation of an asset. We interpret this deviation as a liquidity effect and develop a new liquidity measure quantifying the price dispersion in the context of the US corporate bond market. This market offers a unique opportunity to study liquidity effects since, from October 2004 onwards, all OTC transactions in this market have to be reported to a common database known as the Trade Reporting and Compliance Engine (TRACE). Furthermore, market-wide average price quotes are available from Markit Group Limited, a financial information provider. Thus, it is possible, for the first time, to directly observe deviations between transaction prices and the expected market valuation of securities. We quantify and analyze our new liquidity measure for this market and find significant price dispersion effects that cannot be simply captured by bid-ask spreads. We show that our new measure is indeed related to liquidity by regressing it on commonly-used liquidity proxies and find a strong relation between our proposed liquidity measure and bond characteristics, as well as trading activity variables. Furthermore, we evaluate the reliability of end-of-day marks that traders use to value their positions. Our evidence suggests that the price deviations are significantly larger and more volatile than previously assumed. Overall, the results presented here improve our understanding of the drivers of liquidity and are important for many applications in OTC markets, in general.
Price Dispersion In Otc Markets
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Author : Marti G. Subrahmanyam
language : en
Publisher:
Release Date : 2012
Price Dispersion In Otc Markets written by Marti G. Subrahmanyam and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2012 with categories.
In this paper, we model price dispersion effects in over-the-counter (OTC) markets to show that, in the presence of inventory risk for dealers and search costs for investors, traded prices may deviate from the expected market valuation of an asset. We interpret this deviation as a liquidity effect and develop a new liquidity measure quantifying the price dispersion in the context of the US corporate bond market. This market offers a unique opportunity to study liquidity effects since, from October 2004 onwards, all OTC transactions in this market have to be reported to a common database known as the Trade Reporting and Compliance Engine (TRACE). Furthermore, market-wide average price quotes are available from Markit Group Limited, a financial information provider. Thus, it is possible, for the first time, to directly observe deviations between transaction prices and the expected market valuation of securities. We quantify and analyze our new liquidity measure for this market and find significant price dispersion effects that cannot be simply captured by bid-ask spreads. We show that our new measure is indeed related to liquidity by regressing it on commonly-used liquidity proxies and find a strong relation between our proposed liquidity measure and bond characteristics, as well as trading activity variables. Furthermore, we evaluate the reliability of end-of-day marks that traders use to value their positions. Our evidence suggests that the price deviations from expected market valuations are significantly larger and more volatile than previously assumed. Overall, the results presented here improve our understanding of the drivers of liquidity and are important for many applications in OTC markets, in general.
Discriminatory Pricing Of Over The Counter Derivatives
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Author : Hau Harald
language : en
Publisher: International Monetary Fund
Release Date : 2019-05-07
Discriminatory Pricing Of Over The Counter Derivatives written by Hau Harald and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019-05-07 with Business & Economics categories.
New regulatory data reveal extensive price discrimination against non-financial clients in the FX derivatives market. The client at the 90th percentile pays an effective spread of 0.5%, while the bottom quarter incur transaction costs of less than 0.02%. Consistent with models of search frictions in over-the-counter markets, dealers charge higher spreads to less sophisticated clients. However, price discrimination is eliminated when clients trade through multi-dealer request-for-quote platforms. We also document that dealers extract rents from captive clients and market opacity, but only for contracts negotiated bilaterally with unsophisticated clients.
Inventory Management Dealers Connections And Prices In Otc Markets
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Author :
language : en
Publisher:
Release Date : 2021
Inventory Management Dealers Connections And Prices In Otc Markets written by and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2021 with categories.
We propose a new model of trading in OTC markets. Dealers accumulate inven tories 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 het erogeneously 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.
Inventory Management Dealers Connections And Prices In Otc Markets
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Author : Jean-Édouard Colliard
language : en
Publisher:
Release Date : 2018
Inventory Management Dealers Connections And Prices In Otc Markets written by Jean-Édouard Colliard and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018 with Liquidity (Economics) categories.
We propose a new model of interdealer trading. Dealers trade together to reduce their inventory holding costs. Core dealers share these costs efficiently and provide liquidity to peripheral dealers, who have heterogeneous access to core dealers. We derive predictions about the effects of peripheral dealers' connectedness to core dealers and the allocation of aggregate inventories between core and peripheral dealers on the distribution of interdealer prices, the efficiency of interdealer trades, and trading costs for the dealers' clients. For instance, the dispersion of interdealer prices is higher when fewer peripheral dealers are connected to core dealers or when their aggregate inventory is higher.
Discriminatory Pricing Of Over The Counter Derivatives
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Author : Harald Hau
language : en
Publisher: International Monetary Fund
Release Date : 2019-05-07
Discriminatory Pricing Of Over The Counter Derivatives written by Harald Hau and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019-05-07 with Business & Economics categories.
New regulatory data reveal extensive price discrimination against non-financial clients in the FX derivatives market. The client at the 90th percentile pays an effective spread of 0.5%, while the bottom quarter incur transaction costs of less than 0.02%. Consistent with models of search frictions in over-the-counter markets, dealers charge higher spreads to less sophisticated clients. However, price discrimination is eliminated when clients trade through multi-dealer request-for-quote platforms. We also document that dealers extract rents from captive clients and market opacity, but only for contracts negotiated bilaterally with unsophisticated clients.
Liquidity And Counterparty Risk In Otc Markets
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Author : Patrick Christian Kiefer
language : en
Publisher:
Release Date : 2014
Liquidity And Counterparty Risk In Otc Markets written by Patrick Christian Kiefer and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
I study dispersion of CDS premia in a theoretical over-the-counter (OTC) economy. Agents have heterogeneous expectations about counterparty and reference entity default rates. In equilibrium, spreads of CDS contracts vary based on counterparty characteristics even if reference entity risk is fixed. Price distortions from counterparty risk are more pronounced in markets with less liquidity. Heterogeneous beliefs imply agents do better than break-even from trade in expectation. I derive an equilibrium pricing kernel that allocates expected gains from trade between counterparties based on their beliefs and relative bargaining power. The model suggests central clearing counterparties will have more impact on prices in markets that are less liquid. I show the widely-used risk-neutral CDS spread is a special case of the spread obtained in the search model.
Does Dodd Frank Affect Otc Transaction Costs And Liquidity Evidence From Real Time Cds Trade Reports
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Author : Yee Cheng Loon
language : en
Publisher:
Release Date : 2015
Does Dodd Frank Affect Otc Transaction Costs And Liquidity Evidence From Real Time Cds Trade Reports written by Yee Cheng Loon and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015 with categories.
This paper examines transaction costs and liquidity in the index CDS market by matching intraday quotes to real-time trade reports made available through the Dodd-Frank reforms. We find that the average relative effective spread is 0.27% of price level or 2.73% of CDS spread. Dodd-Frank does affect transaction costs and liquidity. Liquidity improves after the commencement of public dissemination of OTC derivatives trades. Moreover, cleared trades, trades executed on exchange-like venues, end-user trades, and bespoke trades exhibit lower trading costs, price impact, and price dispersion. These findings improve our understanding of the OTC derivatives market that is undergoing fundamental changes.
Price Discovery In Illiquid Markets
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Author : Richard C. Green
language : en
Publisher:
Release Date : 2009
Price Discovery In Illiquid Markets written by Richard C. Green and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2009 with categories.
We study the price discovery of municipal bonds, an important OTC market. As in markets for consumer goods, prices quot;rise faster than they fall.quot; Round-trip profits to dealers on retail trades increase in rising markets but do not decrease in falling markets. Effective half-spreads increase or decrease more when movements in fundamentals favor dealers. Yield spreads relative to treasuries also adjust with asymmetric speed in rising and falling markets. Intra-day price dispersion is asymmetric in rising and falling markets, as consumer search theory would predict.
The Market S Left Behind
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Author : Tima T. Moldogaziev
language : en
Publisher:
Release Date : 2018
The Market S Left Behind written by Tima T. Moldogaziev and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018 with categories.
This study addresses the determinants of municipal secondary trade prices for state general obligation bonds issued during 2005-2010. I find that a two-component finite mixture model, as postulated in the hypothesis of price dispersion under market opacity, remains the best specification for the municipal secondary market. There are distinct pricing regimes that persist even after controlling for the effects of illiquidity, market segmentation, fixed costs, and market fundamentals. Consistent with the theory of information economics, some municipal transactions (predominantly smaller household trades) are facing inferior prices in the municipal OTC market. Moreover, trades in the more informed price regime appear to be facing prices that became even more favorable during and after the Great Recession, while trades in the less informed price regime appear to be worse-off during the same period.