Dealers' Insurance, Market Structure, And Liquidity

Carapella, Francesca; Monnet, Cyril (11 July 2018). Dealers' Insurance, Market Structure, And Liquidity (Discussion Papers 18-12). Bern: Department of Economics

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We develop a parsimonious model to study the equilibrium structure of over-the-counter securities markets. We show that regulations aimed at reducing counterparty risk and improving liquidity can be inefficient. Such regulations have a direct positive effect on entry in those markets, thus fostering competition and lowering spreads. Greater competition, however, has an indirect negative effect on market making profitability, this effect being stronger on more efficient intermediaries. Thus, general equilibrium effects result in reduced incentives of all intermediaries to invest in efficient technologies and can cause a social welfare loss. The equilibrium outcome is consistent with some empirical findings on the effects of post-crisis regulations and with the observed resistance by some market participants to those regulations.

Item Type:

Working Paper

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Department of Economics

UniBE Contributor:

Carapella, Francesca and Monnet, Cyril

Subjects:

300 Social sciences, sociology & anthropology > 330 Economics

Series:

Discussion Papers

Publisher:

Department of Economics

Language:

English

Submitter:

Lars Tschannen

Date Deposited:

02 Sep 2020 12:02

Last Modified:

02 Sep 2020 12:02

JEL Classification:

G11, G23, G28

BORIS DOI:

10.7892/boris.145861

URI:

https://boris.unibe.ch/id/eprint/145861

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