Structural Organization of Secondary Markets: Clearing Frequency, Dealer Activity and Liquidity Risk

Liquidity and Asset Prices

“…Kamara proposes to measure the liquidity difference between notes and bills as the product of the volatility of the underlying rate (estimated from a GARCH model) by the ratio of the bills' turnover to the notes' turnover, where turnover is calculated using the ratio of dealer transactions to the absolute value of their net positions. This measure of "liquidity risk" of a trade reflects the variance of the security's value between the point in time when a trader wishes to trade and the point when she actually trades (Garbade and Silber, 1979; 20 A similar observation on the yield differential between notes and bills is made by Garbade (1984). The notes-bills difference has considerably shrunk recently (Strebulaev, 2002), which may be attributed at least in part to structural changes in the fixed-income market.…”

Order Consolidation, Price Efficiency, and Extreme Liquidity Shocks

“…Admati and Pfleiderer (1988), Foster and Viswanathan (1990), and Barclay and Hendershott (2004) examine how traders can benefit by consolidating their trading in time. Garbade and Silber (1979), Mendelson (1987), Pagano (1989), Amihud, Lauterbach, and Mendelson (2003), and Hendershott and Jones (2005) analyze how liquidity externalities can also arise when traders consolidate across markets and securities. Of the papers on consolidation across markets, only Hendershott and Jones (2005) focus on price efficiency, and their results arise from a regulatory shock to consolidation, not from a comparison of different market structures.…”

The Determinants of CDS Bid-Ask Spreads

“…We assume that the inventory cost component is determined both by variability of CDS premia as well as by the expected time necessary to close a position. This follows the standard results based on the 'inventory control' models of the bid-ask spread in the equity markets (Garbade and Silber, 1979;Stoll, 1980, 1981;Amihud and Mendelson, 1980). These models assume that risk averse market makers have optimal inventory positions.…”

“…As explanatory variables we consider proxies that are related to 1 the inventory cost component and adverse selection component. Such approach is motivated by the broad literature on market making in the equity-markets, which proposes the 'inventory control' models (Garbade and Silber, 1979;Stoll, 1980, 1981;Amihud and Mendelson, 1980) and the 'adverse selection' models (Kyle, 1985;Glosten and Milgrom, 1985;Easley and O'Hara, 1987). We also consider several variables related to the nature of credit risk of reference entities, market-wide factors and dealer competition.…”