The Cost of Immediacy for Corporate Bonds

Jens Dick-Nielsen; Marco Rossi

The Cost of Immediacy for Corporate Bonds

Jens Dick-Nielsen, Marco Rossi

Department of Finance

Texas A&M University

Research output: Contribution to conference › Paper › Research › peer-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.

Original language	English
Publication date	2017
Number of pages	38
Publication status	Published - 2017
Event	The 77th Annual Meeting of American Finance Association. AFA 2017 - Sheraton Grand Chicago, Chicago, United States Duration: 6 Jan 2017 → 8 Jan 2017 Conference number: 77 http://www.afajof.org/details/page/8672741/Paper-Submission-2017.html

Conference

Conference	The 77th Annual Meeting of American Finance Association. AFA 2017
Number	77
Location	Sheraton Grand Chicago
Country/Territory	United States
City	Chicago
Period	06/01/2017 → 08/01/2017
Internet address	http://www.afajof.org/details/page/8672741/Paper-Submission-2017.html

Keywords

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

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Cite this

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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.

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KW - Transaction costs

KW - Dodd-Frank Act

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KW - Lehman/Barclay bond index

KW - Market making

KW - Transaction costs

KW - Dodd-Frank Act

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