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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title When Big Banks Exit OTC Markets: Liquidity, Prices, and Spillover Effects
Organization Unit
  • Andrada Bilan
  • Yalin Gunduz
  • English
Institution University of Zurich
Series Name -
Number -
Date 2019
Abstract Text This paper studies the real effects of a change in the dealer composition in OTC markets. Using as a laboratory the universe of CDS transactions entered into by German banks and the exit of a large dealer in November 2014 as a shock, we first show that the CDS market converges to a new equilibrium, with lower traded volumes and higher bid-ask spreads. Using individual portfolios we find that in response investors rebalance both their CDS holdings and bond portfolios. In particular, CDS protection buyers decrease their holdings of the bonds underlying CDS contracts. The effects are strongest for non-investment grade bonds. We therefore show that the exit of large dealers from OTC markets could affect investor demand in related securities and, in consequence, the issuers cost of capital.
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