Title

Endogenous Specialization and Dealer Networks

Author(s)

Batchimeg Sambalaibat Batchimeg Sambalaibat (Princeton University)

Abstract

OTC markets exhibit a core-periphery network: 10-30 central dealers trade frequently and with many dealers, while hundreds of peripheral dealers trade sparsely and with few dealers. Existing work rationalize this phenomenon with exogenous dealer heterogeneity. We build a search-based model of network formation and propose that a core-periphery network arises from specialization. Dealers endogenously specialize in different clients with different liquidity needs. The clientele difference across dealers, in turn, generates dealer heterogeneity and the core-periphery network: The dealers specializing in clients who trade frequently form the core, while the dealers specializing in buy-and-hold investors form the periphery.

Creation Date

2019-07

Section URL ID

Paper Number

2019-18

URL

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2676116

File Function

Jel

F10, G10, G19

Keyword(s)

Network formation, core-periphery, directed search, clientele effect, specialization, intermediation chains, over-the-counter (OTC) markets, search frictions, interdealer markets

Suppress

false

Series

13