This paper studies a search-based model of OTC markets in which clients with heterogenous trading needs direct their trades to one of ex-ante identical dealers. The main insight of the paper is that the way clients sort across dealers shapes dealer-to-dealer trading patterns and, in turn, generates a core-periphery interdealer network structure. Dealers in the model become heterogeneous because they attract different clients in equilibrium....

I build a search model of bond and credit default swap (CDS) markets with endogenous investor participation and show that shorting bonds through CDS increases the liquidity and price of bonds. By allowing investors to trade the credit risk of bonds without trading the bonds, CDS introduction expands the set of feasible trades and attracts investors into the credit market. Because search is non-directed within...