The Same Bond at Different Prices: Identifying Search Frictions and Selling Pressures

68 Pages Posted: 3 Jun 2009 Last revised: 16 Mar 2010

Date Written: March 5, 2010

Abstract

I model how corporate bond prices are affected by search frictions and occasional selling pressures and test my predictions empirically. A key prediction is that in a distressed market with more sellers than buyers, prices paid by large traders decrease more than those of small traders. Using a structural estimation, the model is able to identify liquidity crises (i.e. high number of forced sellers) based on the relative prices of small and large traders. New light is shed on two crises, the downgrade of GM and Ford in 2005 and the subprime crisis. The model can also explain why the spread between corporate bond yields and Treasury yields is so large, the so-called credit spread puzzle.

Keywords: liquidity, corporate bonds, search frictions, selling pressure, over-the-counter

JEL Classification: G12

Suggested Citation

Feldhütter, Peter, The Same Bond at Different Prices: Identifying Search Frictions and Selling Pressures (March 5, 2010). Available at SSRN: https://ssrn.com/abstract=1413672 or http://dx.doi.org/10.2139/ssrn.1413672

Peter Feldhütter (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

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