The Cost of Immediacy for Corporate Bonds
43 Pages Posted: 1 Jun 2016
Date Written: May 5, 2016
Liquidity provision in the corporate bond market has become significantly more expensive after the 2008 credit crisis. Using index exclusions as a natural experiment during which uninformed index trackers request immediacy, we find that the price of immediacy has doubled for short-term investment grade bonds, and more than tripled for speculative-grade bonds. The increased cost of immediacy is a side-effect of a ban on proprietary trading (Volker Rule) and tighter post-crisis capital regulations, which have resulted in lower aggregate dealer inventories.
Keywords: Dealer inventory, Lehman/Barclay bond index, Market making, Transaction costs, Dodd-Frank Act
JEL Classification: C23, G12
Suggested Citation: Suggested Citation