Size Effects in the Pricing of Corporate Bonds

30 Pages Posted: 15 Nov 2013

See all articles by Padma Kadiyala

Padma Kadiyala

Pace University - Lubin School of Business

P.V. Viswanath

Pace University - Lubin School of Business

Date Written: November 2013

Abstract

Large orders for corporate bonds get preferential treatment unlike large orders for stocks on the NYSE. A structural explanation, namely, that the corporate bond market is dealer‐dominated, has been offered for the favorable pricing. In this paper, we offer an additional explanation, namely, that the improved pricing for large orders is due to the net impact such orders have on a market maker's costs. Using a data sample that is substantially free of timing mismatch, we support our assertion by sorting the sample into ‘brokered’ trades, which are trades where the dealer merely crosses buy and sell orders and ‘inventoried’ trades, where the dealer trades out of his inventory. We find that large orders raise information costs, but lower inventory costs for ‘inventoried’ trades. The net result is a smaller price advantage than received by large orders on ‘brokered’ trades which are not subject to these costs.

Suggested Citation

Kadiyala, Padma and Viswanath, P.V., Size Effects in the Pricing of Corporate Bonds (November 2013). Financial Markets, Institutions & Instruments, Vol. 22, Issue 4, pp. 229-258, 2013, Available at SSRN: https://ssrn.com/abstract=2354704 or http://dx.doi.org/10.1111/fmii.12011

Padma Kadiyala (Contact Author)

Pace University - Lubin School of Business ( email )

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914-773-3620 (Phone)

P.V. Viswanath

Pace University - Lubin School of Business ( email )

Lubin School of Business
1, Pace Plaza
New York, NY 10038
United States
212-618-6518 (Phone)
212-618-6540 (Fax)

HOME PAGE: http://webpage.pace.edu/pviswanath

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