The Cost of Immediacy for Corporate Bonds
74 Pages Posted: 2 Sep 2012 Last revised: 20 Feb 2018
Date Written: February 19, 2018
Liquidity provision for corporate bonds has become significantly more expensive after the 2008 crisis. Using index exclusions as a natural experiment during which uninformed index trackers request immediacy, we find that the cost of immediacy has more than doubled. In addition, the supply of immediacy has become more elastic with respect to its price. Consistent with a stringent regulatory environment incentivizing smaller dealer inventories, we also find that dealers revert deviations from their target inventory more quickly after the crisis. Finally, we investigate the pricing impact of information, changes in ownership structure, and differences between bank and non-bank dealers.
Keywords: Dealer inventory, Lehman/Barclay bond index, Market making, Transaction costs, Dodd-Frank Act
JEL Classification: C23, G12
Suggested Citation: Suggested Citation