The Cost of Immediacy for Corporate Bonds

Jens Dick-Nielsen, Rossi Marco

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

Liquidity provision in the corporate bond market has become significantly more expensive after the 2008 credit crisis. Using index exclusions as a natural experiment during which uninformed index trackers request immediacy, we find that the price of immediacy has doubled for short-term investment grade bonds, and more than tripled for speculative-grade bonds. The increased cost of immediacy is a side-effect of a ban on proprietary trading (Volker Rule) and tighter post-crisis capital regulations, which have resulted in lower aggregate dealer inventories.
Liquidity provision in the corporate bond market has become significantly more expensive after the 2008 credit crisis. Using index exclusions as a natural experiment during which uninformed index trackers request immediacy, we find that the price of immediacy has doubled for short-term investment grade bonds, and more than tripled for speculative-grade bonds. The increased cost of immediacy is a side-effect of a ban on proprietary trading (Volker Rule) and tighter post-crisis capital regulations, which have resulted in lower aggregate dealer inventories.

Conference

ConferenceThe 77th Annual Meeting of American Finance Association. AFA 2017
Number77
LocationSheraton Grand Chicago
CountryUnited States
CityChicago
Period06/01/201708/01/2017
Internet address

Keywords

  • Dealer inventory
  • Lehman/Barclay bond index
  • Market making
  • Transaction costs
  • Dodd-Frank Act

Cite this

Dick-Nielsen, J., & Marco, R. (2017). The Cost of Immediacy for Corporate Bonds. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States.
Dick-Nielsen, Jens ; Marco, Rossi. / The Cost of Immediacy for Corporate Bonds. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States.38 p.
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Dick-Nielsen, J & Marco, R 2017, 'The Cost of Immediacy for Corporate Bonds' Paper presented at, Chicago, United States, 06/01/2017 - 08/01/2017, .

The Cost of Immediacy for Corporate Bonds. / Dick-Nielsen, Jens; Marco, Rossi.

2017. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States.

Research output: Contribution to conferencePaperResearchpeer-review

TY - CONF

T1 - The Cost of Immediacy for Corporate Bonds

AU - Dick-Nielsen,Jens

AU - Marco,Rossi

PY - 2017

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AB - Liquidity provision in the corporate bond market has become significantly more expensive after the 2008 credit crisis. Using index exclusions as a natural experiment during which uninformed index trackers request immediacy, we find that the price of immediacy has doubled for short-term investment grade bonds, and more than tripled for speculative-grade bonds. The increased cost of immediacy is a side-effect of a ban on proprietary trading (Volker Rule) and tighter post-crisis capital regulations, which have resulted in lower aggregate dealer inventories.

KW - Dealer inventory

KW - Lehman/Barclay bond index

KW - Market making

KW - Transaction costs

KW - Dodd-Frank Act

KW - Dealer inventory

KW - Lehman/Barclay bond index

KW - Market making

KW - Transaction costs

KW - Dodd-Frank Act

M3 - Paper

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Dick-Nielsen J, Marco R. The Cost of Immediacy for Corporate Bonds. 2017. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States.