Liquidity and Fragility in Derivative Dealer Markets (original) (raw)

SSRN Electronic Journal, 2000

Abstract

ABSTRACT This project studies derivatives markets, where liquidity depends crucially on a small group of key dealer banks with large trading activities. We plan to consider a theoretical over-the-counter market in which a few large dealer banks searches and establishes long term credit derivative relationships with a large number of smaller banks. We will provide the steady state size and net credit exposure of each dealer, as well as the terms of the credit derivative contracts they negotiate with their customers. We will study the conditions leading to a concentrated market structure, favoring a select few large players. Next, we will analyze how such a structure might be fragile in the sense that what appear to be isolated shocks can have large effects. In this way, this projects seeks to shed light on the tradeoff between efficiency in normal times with robustness during potential crises.

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