Dealer Inventory and the Cost of Immediacy

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

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.
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.

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
Internet address

Bibliographical note

CBS Library does not have access tot he material

Keywords

    Cite this

    Dick-Nielsen, J. (2013). Dealer Inventory and the Cost of Immediacy. Paper presented at 2013 Fixed Income Conference - Darla Moore School of Business, Columbia, SC , United States.
    Dick-Nielsen, Jens. / Dealer Inventory and the Cost of Immediacy. Paper presented at 2013 Fixed Income Conference - Darla Moore School of Business, Columbia, SC , United States.46 p.
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    abstract = "This study shows that the recent 80{\%} decrease in dealer inventories ofcorporate 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.",
    keywords = "Dealer inventory, Lehman/Barclay bond index, Market making, Transaction costs, Dodd-Frank Act",
    author = "Jens Dick-Nielsen",
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    Dick-Nielsen, J 2013, 'Dealer Inventory and the Cost of Immediacy' Paper presented at, Columbia, SC , United States, 19/04/2013 - 20/04/2013, .

    Dealer Inventory and the Cost of Immediacy. / Dick-Nielsen, Jens.

    2013. Paper presented at 2013 Fixed Income Conference - Darla Moore School of Business, Columbia, SC , United States.

    Research output: Contribution to conferencePaperResearchpeer-review

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    PY - 2013

    Y1 - 2013

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    AB - This study shows that the recent 80% decrease in dealer inventories ofcorporate 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.

    KW - Dealer inventory

    KW - Lehman/Barclay bond index

    KW - Market making

    KW - Transaction costs

    KW - Dodd-Frank Act

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    Dick-Nielsen J. Dealer Inventory and the Cost of Immediacy. 2013. Paper presented at 2013 Fixed Income Conference - Darla Moore School of Business, Columbia, SC , United States.