Abstract
We propose a novel measure of intermediary risk exposure based on the fraction of all trade that is conducted between dealers, called the interdealer trade (IDT) measure. Intuitively, when dealers’ aggregate risk exposure rises, they trade more with each other to redistribute inventory shocks. Consistent with risk exposures relating to expected returns, market-specific IDT measures add incremental return predictability across five different markets. For example, one-standard-deviation increases in the Treasury and foreign exchange (FX) IDT measures, respectively, forecast a 1.8% higher annual excess return on a five-year bond and a 3.7% higher annual excess return on currency-specific FX trades. This paper was accepted by David Sraer, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.01831 .
Published Version
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
