Endogenous Market Making and Network Formation

58 Pages Posted: 29 Apr 2015 Last revised: 3 Aug 2021

See all articles by Briana Chang

Briana Chang

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Shengxing Zhang

London School of Economics (LSE) - Department of Economics

Date Written: July 30, 2021

Abstract

We propose a dynamic model of the over-the-counter market that jointly determines traders' connections with prices and asset flows. In an environment where ex ante homogeneous traders face uncertainty of other’s trading needs, a multilayered hierarchical market structure emerges to allow traders to better target their counterparties over time. Traders at a higher tier are committed to providing immediacy to those at a lower tier and become more central. Not only does the model rationalize the highly concentrated market and lengthy intermediation chains, it also generates new predictions for dealer centrality and markups that are consistent with the micro-level data.

Keywords: Trading Network, Over-the-Counter Market, Intermediation

JEL Classification: C70, G1, G20

Suggested Citation

Chang, Briana and Zhang, Shengxing, Endogenous Market Making and Network Formation (July 30, 2021). Available at SSRN: https://ssrn.com/abstract=2600242 or http://dx.doi.org/10.2139/ssrn.2600242

Briana Chang

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States

Shengxing Zhang (Contact Author)

London School of Economics (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

HOME PAGE: http://https://sites.google.com/site/oo7zsx/

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