The Cost of Immediacy for Corporate Bonds

43 Pages Posted: 1 Jun 2016

See all articles by Jens Dick-Nielsen

Jens Dick-Nielsen

Copenhagen Business School - Department of Finance

Marco Rossi

Texas A&M

Multiple version iconThere are 2 versions of this paper

Date Written: May 5, 2016

Abstract

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

Dick-Nielsen, Jens and Rossi, Marco, The Cost of Immediacy for Corporate Bonds (May 5, 2016). Paris December 2016 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2787345 or http://dx.doi.org/10.2139/ssrn.2787345

Jens Dick-Nielsen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Marco Rossi

Texas A&M ( email )

360S Wehner
College Station, TX 77843-4218
United States

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