Betydningen af transparens for likviditetspræmier på det amerikanske erhvervsobligationsmarked

Thusjanthan Gunapalasingham & Martin Hagelund

Student thesis: Master thesis

Abstract

Through empirical analysis, this master thesis has examined the impact of transparency on the US corporate bond market. The findings of this thesis indicate that transparency leads to an immediate 10 basis points (bps) decrease in liquidity premiums for transparent corporate bonds. Over time, an additional 10 bps decrease in liquidity premiums for transparent bonds is found. Despite this decrease, it is found that during the global financial crisis liquidity premiums increases by up to 20 bps for transparent bonds. This means that transparency can lead to decreasing liquidity premiums. However, it cannot prevent the negative effect of a global crisis altogether. Lastly, this thesis finds that trades in bonds, which are not disseminated to the public, have up to 40 bps lower liquidity premiums than disseminated trades. This discovery applies from 2005 and onwards and indicates that non-disseminated trades are carried out with some sort of advantage. The empirical analysis is conducted using all over-the-counter (OTC) corporate bond transactions in the secondary market from July 2002 to December 2010. Only bonds with credit ratings above B- are analysed. The transactions are reported by all brokers to the Financial Industry Regulatory Authority (FINRA) through the Trade Reporting and Compliance Engine (TRACE) system. Since transaction costs can be seen as a measure of liquidity premiums, these are estimated by use of an econometric model. The model estimates transaction costs by use of ordinary least squares (OLS) and weighted least squares (WLS) methods. To support the conclusions from the transaction cost estimation, we estimate liquidity premiums using an alternative econometric model. This model regresses the yield spread of corporate bonds and an interpolated swap curve. The results are assesed to be robust by relaxing some of the assumptions on which the models are based. Based on the methods and results in this thesis, it is concluded that transparency has an impact on liquidity premiums in the US corporate bond market. In an working paper, the European Central Bank (ECB) suggests that post-trade transparency might not lead to decreasing liquidity premiums in the European corporate bond market due to tougher competition and lower diversification than in the US corporate bond market. However, based on the empirical work of this thesis, it seems the ECB might have underestimated the benefits of post-trade transparency.

EducationsMSc in Mathematics , (Graduate Programme) Final Thesis
LanguageDanish
Publication date2013
Number of pages139