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The Execution Quality of Corporate Bonds

50 Pages Posted: 27 Oct 2015 Last revised: 9 Jul 2016

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management

Yihui Wang

Fordham University

Xing (Alex) Zhou

Board of Governors of the Federal Reserve System

Date Written: June 1, 2016

Abstract

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

Suggested Citation

O'Hara, Maureen and Wang, Yihui and Zhou, Xing (Alex), The Execution Quality of Corporate Bonds (June 1, 2016). Fordham University Schools of Business Research Paper No. 2680480. Available at SSRN: https://ssrn.com/abstract=2680480 or http://dx.doi.org/10.2139/ssrn.2680480

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)

Yihui Wang

Fordham University ( email )

33 West 60th Street
New York, NY 10023
United States

Xing Zhou (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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