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

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish (US)
Article number100617
JournalJournal of Financial Markets
DOIs
StateAccepted/In press - 2021

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Credit default swap
  • Dealer inventory
  • Index basis
  • Intermediary asset pricing

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