Customer Liquidity Provision: Implications for Corporate Bond Transaction Costs

49 Pages Posted: 8 Oct 2016 Last revised: 9 Aug 2019

See all articles by Jaewon Choi

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance

Yesol Huh

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2019

Abstract

The convention in calculating corporate bond trading costs is to estimate bid-ask spreads that customers pay, implicitly assuming that dealers always provide liquidity to customers. We show that, contrary to this assumption, customers increasingly provide liquidity after the post-2008 banking regulations were adopted and, thus, conventional bid-ask spread measures underestimate the cost of dealers' liquidity provision to customers. Among large trades wherein dealers use inventory capacity, customers pay 35 to 60 percent wider spreads than before the crisis. Our results help explain the puzzling finding in the literature that transaction costs remain low despite the decrease in dealers' risk capacity.

Keywords: Corporate bond liquidity, Volcker Rule, Capital regulation, Bank regulations, Financial intermediation

JEL Classification: G10, G21, G28

Suggested Citation

Choi, Jaewon and Huh, Yesol, Customer Liquidity Provision: Implications for Corporate Bond Transaction Costs (August 1, 2019). Available at SSRN: https://ssrn.com/abstract=2848344 or http://dx.doi.org/10.2139/ssrn.2848344

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Yesol Huh (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
(202) 973-6943 (Phone)

HOME PAGE: http://sites.google.com/site/yesolhuh

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
605
Abstract Views
3,122
rank
46,937
PlumX Metrics