Dealer Behavior and the Trading of Newly Issued Corporate Bonds PDF Download
Are you looking for read ebook online? Search for your book and save it on your Kindle device, PC, phones or tablets. Download Dealer Behavior and the Trading of Newly Issued Corporate Bonds PDF full book. Access full book title Dealer Behavior and the Trading of Newly Issued Corporate Bonds by Michael A. Goldstein. Download full books in PDF and EPUB format.
Author: Michael A. Goldstein
Publisher:
ISBN:
Category :
Languages : en
Pages : 38
Get Book Here
Book Description
This study examines dealer behavior and trading activity for a sample of 3,181 newly issued corporate bonds, focusing on underpricing at issuance and subsequent price dispersion. Unlike the equity market, the measured underpricing is the result of both an ex-ante pricing decision made by the bonds' underwriters and significant price dispersion that occurs in the after-market for trading corporate bonds. For the full sample, underpricing averages 45 basis points (BP) for investment grade and 124 BP for high yield offerings. In the aftermarket, customers purchasing a bond on the same day from the same dealer frequently pay prices differing by over $2 (per $100 face amount). However, the introduction of transparency is associated with a reduction in underpricing and aftermarket price dispersion. Whether these gains are potentially passed on to issuing companies is less clear, as non-syndicate member dealers account for a significant proportion of after-market trading activity and price dispersion. Finally, regardless of transparency regime, there is no evidence that dealers in newly issued bonds accumulate significant inventory positions, even when issues subsequently trade below the offering price.
Author: Michael A. Goldstein
Publisher:
ISBN:
Category :
Languages : en
Pages : 38
Get Book Here
Book Description
This study examines dealer behavior and trading activity for a sample of 3,181 newly issued corporate bonds, focusing on underpricing at issuance and subsequent price dispersion. Unlike the equity market, the measured underpricing is the result of both an ex-ante pricing decision made by the bonds' underwriters and significant price dispersion that occurs in the after-market for trading corporate bonds. For the full sample, underpricing averages 45 basis points (BP) for investment grade and 124 BP for high yield offerings. In the aftermarket, customers purchasing a bond on the same day from the same dealer frequently pay prices differing by over $2 (per $100 face amount). However, the introduction of transparency is associated with a reduction in underpricing and aftermarket price dispersion. Whether these gains are potentially passed on to issuing companies is less clear, as non-syndicate member dealers account for a significant proportion of after-market trading activity and price dispersion. Finally, regardless of transparency regime, there is no evidence that dealers in newly issued bonds accumulate significant inventory positions, even when issues subsequently trade below the offering price.
Author: Michael A. Goldstein
Publisher:
ISBN:
Category :
Languages : en
Pages : 66
Get Book Here
Book Description
We examine market making behavior of dealers for 55,988 corporate bonds, many of which trade infrequently. Dealers have a substantially higher propensity to offset trades within the same day rather than committing capital for longer periods for riskier and less actively traded bonds. Dealers' holding periods do not decline with a bond's prior trading activity, and in fact are lowest for some of the least active bonds. As a result, cross sectional estimates of roundtrip trading costs do not increase as prior trading activity declines. Our results suggest that dealers endogenously adjust their behavior to mitigate inventory risk from trading in illiquid and higher risk securities, balancing search and inventory costs in equilibrium such that observed spreads can appear invariant to expected liquidity.
Author: Hendrik Bessembinder
Publisher:
ISBN:
Category :
Languages : en
Pages : 68
Get Book Here
Book Description
We study trading costs and dealer behavior in U.S. corporate bond markets from 2006 to 2016. Despite a temporary spike during the financial crisis, average trade execution costs have not increased notably over time. However, alternative measures, including dealer capital commitment over various time horizons, turnover, block trade frequency, and average trade size not only decreased during the financial crisis, but continued to decline afterward. We find that these declines are attributable to bank-affiliated dealers, as non-bank dealers have increased their market commitment. The evidence shows that liquidity provision in the corporate bond markets is evolving away from the traditional commitment of bank-affiliated dealer capital to absorb customer imbalances, and supports the interpretation that post-crisis banking regulations likely contributed.
Author: Richard C. Green
Publisher:
ISBN:
Category :
Languages : en
Pages : 54
Get Book Here
Book Description
We study trading and prices in newly issued municipal bonds. Municipals, which trade in decentralized, broker-dealer markets, are underpriced when issued, but unlike equities the average price rises slowly over a period of several days. We document high levels of price dispersion in newly issued bonds, and show that the average drift upward in price is because of changes in the mix of trades over time. While large trades occur close to the reoffering price, and close to each other, small trades occur at a wide range of prices almost simultaneously. Some small investors appear to be informed about the status of the issue, and trade on attractive terms. Others appear uninformed,and often buy at prices as much as five percent above the reoffering price, at which informed traders buy. We estimate a mixed-distribution model that highlights ex-ante characteristics that discriminate between these types of investors, and quantifies the losses uninformed traders or issuers give up to broker dealers.
Author: Oliver Randall
Publisher:
ISBN:
Category :
Languages : en
Pages : 61
Get Book Here
Book Description
I show that dealer behavior in the US corporate bond market is consistent with dealers bearing a time-varying cost of holding inventory. Liquidity is worse when inventory costs increase, especially for bonds with lower credit ratings, customers with lower bargaining power, and larger trades. When inventory costs increase, dealers sell more high yield bonds, but sell less investment grade, suggesting a flight to quality. Inventory costs don't affect dealers' trades immediately unwound in the inter-dealer market, but do affect the rate at which these trades occur, as dealers' willingness and ability to risk-share in the inter-dealer market change.
Author: Louis H. Ederington
Publisher:
ISBN:
Category :
Languages : en
Pages : 52
Get Book Here
Book Description
Utilizing the large subset of trades in which dealers act purely as agents, we decompose dealer spreads in U.S. corporate bond OTC markets into components arising from: 1) dealers' market-making role, and 2) their role as agents for their non-dealer customers. We investigate the determinants of both components. We find that agent-related spreads are large and comparable in magnitude to market-making spreads. In their role as agents, dealers face liquidity-search and customer interface costs, while in their role as market makers they face inventory and asymmetric information costs. Consistent with this, we find that while market-making spreads are strongly correlated with market risk variables, agent-related spreads are not, depending instead on liquidity driven variables. While market-making spreads are inversely related to trade size, agent-related spreads increase with trade size before leveling off and then declining -- possibly indicating that agent-dealers devote lesser search time to relatively smaller trades. While market-making dealer spreads are positively correlated with risk variables, whether trading directly with non-dealer customers or with dealers acting purely as agents, the difference between the former and the latter is negatively correlated with risk variables implying that market-making dealers benefit more from direct interaction with traders when risk and information asymmetry is higher, consistent with dealers deriving information-related benefits from their customer interface. Except for very small trades, explicit transaction costs of non-dealer customers are lower when they trade directly with market-making dealers than when they route trades through a dealer acting purely as an agent. Finally, we show that existing studies have underestimated average overall trading costs in the corporate bond market by conflating the spreads of dealers acting purely as agents with full dealer spreads that include both agent and market making costs. Given our findings on the size and economic determinants of agent-related dealer costs, our results have significant implications for the extensive empirical literature on dealer spreads in other OTC markets.
Author: Andreas Christian Rapp
Publisher:
ISBN: 9789056685744
Category :
Languages : en
Pages : 169
Get Book Here
Book Description
Author: Yakov Amihud
Publisher: Now Publishers Inc
ISBN: 1933019123
Category : Business & Economics
Languages : en
Pages : 109
Get Book Here
Book Description
Liquidity and Asset Prices reviews the literature that studies the relationship between liquidity and asset prices. The authors review the theoretical literature that predicts how liquidity affects a security's required return and discuss the empirical connection between the two. Liquidity and Asset Prices surveys the theory of liquidity-based asset pricing followed by the empirical evidence. The theory section proceeds from basic models with exogenous holding periods to those that incorporate additional elements of risk and endogenous holding periods. The empirical section reviews the evidence on the liquidity premium for stocks, bonds, and other financial assets.
Author: William F. Maxwell
Publisher:
ISBN:
Category :
Languages : en
Pages : 30
Get Book Here
Book Description
The U.S. corporate bond market underwent a fundamental change with the introduction of TRACE in 2002. Beginning on that date, bond dealers were required to report all trades in publicly-issued corporate bonds to the National Association of Security Dealers, which in turn made transaction data available to the public. In this paper, we assess the impact of the increase in transparency on the corporate bond market. Investors have benefited from the increased transparency, through substantial reductions in the bid-ask spreads that they pay to bond dealers to complete trades. Conversely, bond dealers have experienced reductions in employment and compensation, and dealers' trading activities have moved toward alternate securities, including syndicated bank loans and credit default swaps. The primary complaint against TRACE is that trading is more difficult as dealers are reluctant to carry inventory and no longer share the results of their research. In essence, the cost of trading corporate bonds decreased, but so did the quality and quantity of the services formerly provided by bond dealers. The debate regarding optimal transparency of the corporate bond markets continues, and the question of what degree of transparency in security markets is desirable will remain the subject of study and debate for the foreseeable future.
Author: Anand Srinivasan
Publisher:
ISBN:
Category :
Languages : en
Pages : 16
Get Book Here
Book Description
This is the first exploratory field study of the U.S. inter-dealer OTC corporate bond market. We do this by analyzing the trades of a major bond dealer and through interviews with personnel at the trading desk of this dealer. We document the competitive structure of the market in terms of the number of active dealers, the mechanism used to facilitate trades etc. We find that the mechanism of trading closely resembles a first price sealed bid auction. The number of active dealers is quite small - only 9 dealers account for a large fraction of the trades. We examine potential differences between different segments of the market. We develop a measure of competition for this bidding market based on the theory of auctions. This is the difference between the best and second best bid in a given trade. Our measure of competition indicates that competition is highest in US investment grade corporate bonds and lowest in junk bonds. We also examine the effect of size of the trade on this measure of competition. Surprisingly, large trades do not suffer from any adverse market impact. Lastly, we examine the effect of exclusion of individual bidders on the level of competition. The effect does not appear very large.
