The Execution Quality of Corporate Bonds
50 Pages Posted: 27 Oct 2015 Last revised: 9 Jul 2016
Date Written: June 1, 2016
This paper investigates execution quality issues in corporate bond trading. Using an extensive sample of bond trades by insurance companies, we find that an insurance company entering a trade of similar size and on the same side for the same bond on the same day with the same dealer will receive a better price if it is a more active investor than if it is a less active investor. Trading with the dominant dealer or underwriter worsens these differentials, while greater transparency and smaller trading networks lessens these effects. Our results provide strong evidence of best execution failures in corporate bond trading.
Keywords: Best execution, Corporate bonds, Market Microstructure, Dealer market, Trading Network, Transparency
JEL Classification: G10, G18, G23, G24
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