Abstract
We propose a novel measure of intermediary risk exposure based on the fraction of interdealer trade. Intuitively, when aggregate risk exposure rises, dealers trade more with each other to redistribute customer orders. In the U.S. Treasury market, our measure has a 0.72 correlation with dealers' interest rate Value at Risk, and a one standard deviation increase in our measure forecasts a 1.8 percentage point higher annual excess return on a five-year bond. Extending our analysis to the FX market, a one standard deviation increase in our measure forecasts a 3.2 percentage point higher annual return on carry trades.
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