Intermediation Networks and Derivative Market Liquidity: Evidence from CDS Markets †

Abstract

In over-the-counter markets, dealers facilitate trade by providing liquidity and acting as intermediaries. We use proprietary data on U.S. single-name CDS trades and positions to study how dealer intermediation networks shape liquidity. For each reference entity we reconstruct interdealer and dealer–to-client networks and introduce Shapley-value-based measures of dealer and market connectivity. We present a cooperative game framework that links these measures to predictions for the liquidity dealers provide at both individual and market levels. Empirically, we find that Shapley values are strongly associated with trade volumes, inventory management, execution costs, and bid–ask spreads.