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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27087
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| Title: | Price Formation in the OTC Corporate Bond Markets: A Field Study of the
Inter-Dealer Market |
| Authors: | Saunders, Anthony
Srinivasan, Anand
Walter, Ingo |
| Issue Date: | Oct-1998 |
| Series/Report no.: | FIN-98-089 |
| Abstract: | 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. |
| URI: | http://hdl.handle.net/2451/27087 |
| Appears in Collections: | Finance Working Papers
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