Customer Liquidity Provision: Implications for Corporate Bond Transaction Costs

Management Science, forthcoming

45 Pages Posted: 8 Oct 2016 Last revised: 14 Jun 2022

See all articles by Jaewon Choi

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance; Yonsei University - School of Business

Yesol Huh

Board of Governors of the Federal Reserve System

Sean Seunghun Shin

Aalto University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 10, 2021

Abstract

The convention when 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 following the adoption of post-2008 banking regulations and, thus, conventional bid-ask spread measures underestimate the cost of dealers' liquidity provision. Among large trades wherein dealers use inventory capacity, customers pay 40 to 60 percent wider spreads than before the crisis. Customers' balance-sheet capacity and their trading relationships with dealers are important determinants of customer liquidity provision.

Keywords: Corporate bond liquidity, Customer Liquidity Provision, Bank regulations and OTC liquidity, Insurer Liquidity Provision

JEL Classification: G10, G21, G28

Suggested Citation

Choi, Jaewon and Huh, Yesol and Shin, Seunghun, Customer Liquidity Provision: Implications for Corporate Bond Transaction Costs (December 10, 2021). Management Science, forthcoming, 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

HOME PAGE: http://https://sites.google.com/site/jaewchoi1203

Yonsei University - School of Business ( email )

50 Yonsei-ro, Seodaemun-gu
Seoul, 120-749
Korea, Republic of (South Korea)

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

Seunghun Shin

Aalto University - Department of Finance ( email )

Finland

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