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Transparency and Liquidity: A Controlled Experiment on Corporate Bonds

Edith S. Hotchkiss

Boston College - Carroll School of Management

Michael A. Goldstein

Babson College - Finance Division

Erik R. Sirri

Babson College

March 20, 2006

AFA 2006 Boston Meetings Paper

This paper reports the results of a unique experiment designed to assess the impact of last-sale trade reporting on the liquidity of BBB corporate bonds. We find that increased transparency has either a neutral or positive effect on market liquidity depending on trade size. Measures of trading activity such as daily trading volume and number of transactions per day suggest that increased transparency does not lead to greater trading interest. Except for very large trades, spreads on bonds whose prices become more transparent decline relative to bonds that experience no transparency change. However, we find no effects of transparency for very infrequently traded bonds. The observed decrease in transactions costs is consistent with investors' ability to negotiate better terms of trade with dealers once the investors have access to broader bond pricing data.

Number of Pages in PDF File: 53

Keywords: corporate bonds, transparency, transaction costs, TRACE

JEL Classification: G14

working papers series

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Date posted: March 19, 2005  

Suggested Citation

Hotchkiss, Edith S. and Goldstein, Michael A. and Sirri, Erik R., Transparency and Liquidity: A Controlled Experiment on Corporate Bonds (March 20, 2006). AFA 2006 Boston Meetings Paper. Available at SSRN: http://ssrn.com/abstract=686324 or http://dx.doi.org/10.2139/ssrn.686324

Contact Information

Edith S. Hotchkiss (Contact Author)
Boston College - Carroll School of Management ( email )
140 Commonwealth Avenue
Department of Finance Fulton Hall, Room 330
Chestnut Hill, MA 02467
United States
617-552-3240 (Phone)
617-552-0431 (Fax)
Michael A. Goldstein
Babson College - Finance Division ( email )
320 Tomasso Hall
Babson Park, MA 02457-0310
United States
781-239-4402 (Phone)
781-239-5004 (Fax)
HOME PAGE: http://faculty.babson.edu/goldstein/
Erik R. Sirri
Babson College ( email )
231 Forest Street
Babson Park, MA 02457
United States
781-239-5799 (Phone)
HOME PAGE: http://faculty.babson.edu/sirri/
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