Paper: “Volume and Intermediation in Corporate Bond Markets” joint with Artem Neklyudov and Chester Spatt
Abstract: Size-reporting of trades in corporate bonds is capped when the trade volume is above $1 million for high-yield bonds and above $5 million for investment grade bonds. We use a regulatory sample of trades, masked dealer codes, uncapped and capped trade volumes from the U.S. corporate bond markets from 2002 to 2018 to study the intermediation process for large transactions, quantifying the associated costs and risks. We focus on the heterogeneous dealer network comprising core and peripheral dealers and how the network responds to trades of different size. The key trade-off is between higher search costs of trade splitting and greater bargaining power of dealers on markets for smaller-sized trades. Our analysis highlights the limited impact of trade reporting caps and the distinctive aspects of trading in round- and odd-lot sizes. We use changes in bond rating to estimate the effect of reporting caps on trading costs.
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