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Dealer Inventory and the Cost of Immediacy

Publication: Research - peer-reviewPaper

This study shows that the recent 80% decrease in dealer inventories of
corporate bonds has increased the cost of immediacy. For safe bonds which are quickly turned over again by dealers the increase is up to 15%, while for risky bonds which are kept on inventory by dealers the increase is up to 100% on average. The time series of transaction costs is estimated using the natural experiment of corporate bond index exclusions. The exclusions are monthly and information-free events where index trackers seeking to minimize tracking error request immediacy in order to sell close to the exclusion date. The drop in dealer inventories, and thus the rise in transaction costs, is a side-eect of anticipated tighter regulation, primarily Basel III and the Volcker Rule.

Publication information

Original languageEnglish
Publication date2013
Number of pages46
StatePublished - 2013
Event - Columbia, SC , United States

Conference

Conference2013 Fixed Income Conference - Darla Moore School of Business
Number2
LocationDarla Moore School of Business, University of South Carolina
CountryUnited States
CityColumbia, SC
Period19/04/201320/04/2013
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ID: 38606449