Does Risk Sharing Motivate Interdealer Trading?
Article first published online: 17 DEC 2002
The American Finance Association 1998
The Journal of Finance
Volume 53, Issue 5, pages 1657–1703, October 1998
How to Cite
Reiss, P. C. and Werner, I. M. (1998), Does Risk Sharing Motivate Interdealer Trading?. The Journal of Finance, 53: 1657–1703. doi: 10.1111/0022-1082.00068
- Issue published online: 17 DEC 2002
- Article first published online: 17 DEC 2002
- Cited By
We use unique data from the London Stock Exchange to test whether interdealer trade facilitates inventory risk sharing among dealers. We develop a methodology that focuses on periods of “extreme” inventories—inventory cycles. We further distinguish between inventory cycles that are unanticipated and those that are anticipated because of “worked” orders. The pattern of interdealer trade during inventory cycles matches theoretical predictions for the direction of trade and the inventories of trade counterparts. We also show that London dealers receive higher trading revenues for taking larger positions.