Over-the-Counter Market Frictions and Yield Spread Changes

66 Pages Posted: 10 Dec 2017 Last revised: 23 Nov 2018

See all articles by Nils Friewald

Nils Friewald

Norwegian School of Economics (NHH); Centre for Economic Policy Research (CEPR)

Florian Nagler

Bocconi University

Multiple version iconThere are 2 versions of this paper

Date Written: November 21, 2018


We empirically study whether systematic over-the-counter (OTC) market frictions drive the large unexplained common factor in yield spread changes. Using transaction data on U.S. corporate bonds, we find that marketwide inventory, search, and bargaining frictions explain 23.4% of the variation of the common component. Systematic OTC frictions thus substantially improve the explanatory power of yield spread changes and account for one-third of their total explained variation. Search and bargaining frictions combined explain more in the common dynamics of yield spread changes as inventory frictions. Our findings support the implications of leading theories of intermediation frictions in OTC markets.

Keywords: Corporate bond market, over-the-counter market, yield spread changes, intermediation frictions, dealer market

JEL Classification: G10, G12, G20

Suggested Citation

Friewald, Nils and Nagler, Florian, Over-the-Counter Market Frictions and Yield Spread Changes (November 21, 2018). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3082955 or http://dx.doi.org/10.2139/ssrn.3082955

Nils Friewald

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

Florian Nagler (Contact Author)

Bocconi University ( email )

Via Roentgen 1
Milan, MI 20136

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

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