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Finance Working Papers >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26541
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| Title: | Do Correlated Exposures Influence Intermediary Decision-making? Evidence
from Trading Behavior of Equity Dealers |
| Authors: | Naik, Narayan Y.
Yadav, Pradeep K. |
| Keywords: | Dealer firm
equivalent inventory
correlated risk exposure
unhedgeable risk
effective spreads |
| Issue Date: | 12-Oct-2001 |
| Series/Report no.: | FIN-01-014 |
| Abstract: | This paper investigates whether dealers’ trading and pricing
decisions are governed by their equivalent inventories (based on total
returns as in Ho and Stoll, 1983 or on unhedgeable returns as in Froot
and Stein, 1998) or by their ordinary inventories, as would be the case
in a decentralized market-making organizational structure. It finds that
ordinary inventories, and not equivalent inventories best explain
dealers’ quote placement strategy, which dealer executes trades
and the quality of execution offered to the trades. This finding is
consistent with decentralized market making where, due to information
sharing difficulties or the nature of compensation contracts, individual
dealers care only about risk of stocks managed by them, and not the
positions of other dealers within the firm. |
| URI: | http://hdl.handle.net/2451/26541 |
| Appears in Collections: | Finance Working Papers
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