The Effects of Mandatory Transparency in Financial Market Design: Evidence from the Corporate Bond Market

67 Pages Posted: 5 Sep 2013  

Paul Asquith

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA); National Bureau of Economic Research (NBER)

Thomas R. Covert

University of Chicago - Booth School of Business - Economics

Parag A. Pathak

Massachusetts Institute of Technology (MIT) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 4, 2013

Abstract

Many financial markets have recently become subject to new regulations requiring transparency. This paper studies how mandatory transparency affects trading in the corporate bond market. In July 2002, TRACE began requiring the public dissemination of post-trade price and volume information for corporate bonds. Dissemination took place in Phases, with actively traded, investment grade bonds becoming transparent before thinly traded, high-yield bonds. Using new data and a differences-in-differences research design, we find that transparency causes a significant decrease in price dispersion for all bonds and a significant decrease in trading activity for some categories of bonds. The largest decrease in daily price standard deviation, 24.7%, and the largest decrease in trading activity, 41.3%, occurs for bonds in the final Phase, which consisted primarily of high-yield bonds. These results indicate that mandated transparency may help some investors and dealers through a decline in price dispersion, while harming others through a reduction in trading activity.

Keywords: transparency, corporate bonds, regulation, Dodd-Frank

JEL Classification: D47, G14, G18, L51

Suggested Citation

Asquith, Paul and Covert, Thomas R. and Pathak, Parag A., The Effects of Mandatory Transparency in Financial Market Design: Evidence from the Corporate Bond Market (September 4, 2013). Available at SSRN: https://ssrn.com/abstract=2320623 or http://dx.doi.org/10.2139/ssrn.2320623

Paul Asquith (Contact Author)

Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA) ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Thomas R. Covert

University of Chicago - Booth School of Business - Economics ( email )

Graduate School of Business
1101 East 58th Street
Chicago, IL 60637
United States

Parag A. Pathak

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-391
Cambridge, MA 02142
United States

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