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
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
Date posted: March 19, 2005
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