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Liquidity in U.S. Fixed Income Markets: A Comparison of the Bid-Ask Spread in Corporate, Government and Municipal Bond Markets


Sugato Chakravarty


Purdue University

Asani Sarkar


Federal Reserve Bank of New York

March 1999

FRB of New York Staff Report No. 73

Abstract:     
We examine the determinants of the realized bid-ask spread in the U.S. corporate, municipal and government bond markets for the years 1995 to 1997, based on newly available transactions data. Overall, we find that liquidity is an important determinant of the realized bid-ask spread in all three markets. Specifically, in all markets, the realized bid-ask spread decreases in the trading volume. Additionally, risk factors are important in the corporate and municipal markets. In these markets, the bid-ask spread increases in the remaining-time-to maturity of a bond. The corporate bond spread also increases in credit risk and the age of a bond. The municipal bond spread increases in the after-tax bond yield. Controlling for others factors, the municipal bond spread is higher than the government bond spread by about 9 cents per $100 par value, but the corporate bond spread is not. Consistent with improved pricing transparency, the bid-ask spread in the corporate and municipal bond markets is lower in 1997 by about 7 to 11 cents per $100 par value, relative to the earlier years. Finally, the ten largest corporate bond dealers earn 15 cents per $100 par value higher than the remaining dealers, after controlling for differences in the characteristics of bonds traded by each group. We find no such differences for the government and municipal bond dealers.

Number of Pages in PDF File: 43

JEL Classification: G14

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Date posted: June 4, 1999  

Suggested Citation

Chakravarty, Sugato and Sarkar, Asani, Liquidity in U.S. Fixed Income Markets: A Comparison of the Bid-Ask Spread in Corporate, Government and Municipal Bond Markets (March 1999). FRB of New York Staff Report No. 73. Available at SSRN: http://ssrn.com/abstract=163139 or http://dx.doi.org/10.2139/ssrn.163139

Contact Information

Sugato Chakravarty
Purdue University ( email )
Consumer Sciences
1262 Matthews Hall Rm 214F
West Lafayette, IN 47906
United States
765-494-6427 (Phone)
765-494-0869 (Fax)
HOME PAGE: http://web.ics.purdue.edu/~sugato
Asani Sarkar (Contact Author)
Federal Reserve Bank of New York ( email )
Research Department
33 Liberty Street
New York, NY 10045
United States
212-720-8943 (Phone)
212-720-1582 (Fax)
HOME PAGE: http://www.newyorkfed.org/research/economists/sarkar/pub.html
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