Capital Commitment and Illiquidity in Corporate Bonds

68 Pages Posted: 22 Mar 2016 Last revised: 29 Aug 2017

See all articles by Hendrik Bessembinder

Hendrik Bessembinder

Arizona State University

Stacey E. Jacobsen

Southern Methodist University (SMU) - Finance Department

William F. Maxwell

Southern Methodist University (SMU) - Finance Department

Kumar Venkataraman

Southern Methodist University (SMU) - Finance Department

Date Written: August 28, 2017

Abstract

We study trading costs and dealer behavior in U.S. corporate bond markets from 2006 to 2016. Despite a temporary spike during the financial crisis, average trade execution costs have not increased notably over time. However, alternative measures, including dealer capital commitment over various time horizons, turnover, block trade frequency, and average trade size not only decreased during the financial crisis, but continued to decline afterward. We find that these declines are attributable to bank-affiliated dealers, as non-bank dealers have increased their market commitment. The evidence shows that liquidity provision in the corporate bond markets is evolving away from the traditional commitment of bank-affiliated dealer capital to absorb customer imbalances, and supports the interpretation that post-crisis banking regulations likely contributed.

Keywords: Capital commitment, corporate bonds, dealer behavior, Dodd-Frank Act, financial crisis, liquidity, microstructure, transparency, TRACE, transaction costs

JEL Classification: G14, G18, G24

Suggested Citation

Bessembinder, Hendrik (Hank) and Jacobsen, Stacey E. and Maxwell, William F. and Venkataraman, Kumar, Capital Commitment and Illiquidity in Corporate Bonds (August 28, 2017). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2752610 or http://dx.doi.org/10.2139/ssrn.2752610

Hendrik (Hank) Bessembinder (Contact Author)

Arizona State University ( email )

PO Box 873906
Tempe, AZ 85207
United States

Stacey E. Jacobsen

Southern Methodist University (SMU) - Finance Department ( email )

United States

William F. Maxwell

Southern Methodist University (SMU) - Finance Department ( email )

United States

Kumar Venkataraman

Southern Methodist University (SMU) - Finance Department ( email )

United States
214-768-7005 (Phone)
214-768-4099 (Fax)

HOME PAGE: http://people.smu.edu/kumar/

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