Price Formation in the Otc Corporate Bond Markets: A Field Study of the Inter-Dealer Market

NYU Working Paper No. FIN-98-089

Journal of Economics and Business 54 (2002) 95–113.

16 Pages Posted: 11 Nov 2008

See all articles by Anand Srinivasan

Anand Srinivasan

National University of Singapore - Department of Finance

Ingo Walter

New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance

Date Written: October 1998

Abstract

This is the first exploratory field study of the U.S. inter-dealer OTC corporate bond market. We do this by analyzing the trades of a major bond dealer and through interviews with personnel at the trading desk of this dealer. We document the competitive structure of the market in terms of the number of active dealers, the mechanism used to facilitate trades etc. We find that the mechanism of trading closely resembles a first price sealed bid auction. The number of active dealers is quite small - only 9 dealers account for a large fraction of the trades. We examine potential differences between different segments of the market. We develop a measure of competition for this bidding market based on the theory of auctions. This is the difference between the best and second best bid in a given trade. Our measure of competition indicates that competition is highest in US investment grade corporate bonds and lowest in junk bonds. We also examine the effect of size of the trade on this measure of competition. Surprisingly, large trades do not suffer from any adverse market impact. Lastly, we examine the effect of exclusion of individual bidders on the level of competition. The effect does not appear very large.

Suggested Citation

Srinivasan, Anand and Walter, Ingo, Price Formation in the Otc Corporate Bond Markets: A Field Study of the Inter-Dealer Market (October 1998). NYU Working Paper No. FIN-98-089, Journal of Economics and Business 54 (2002) 95–113., Available at SSRN: https://ssrn.com/abstract=1298294

Anand Srinivasan (Contact Author)

National University of Singapore - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

Ingo Walter

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY 10012
United States
212-998-0707 (Phone)
212-995-4220 (Fax)

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

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