Dealer Inventory, Short Interest and Price Efficiency in the Corporate Bond Market

75 Pages Posted: 4 Jun 2018 Last revised: 13 Dec 2019

See all articles by Antje Berndt

Antje Berndt

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Applied Statistics

Yichao Zhu

Australian National University (ANU), Research school of Finance, Actuarial Studies and Applied Statistics

Date Written: December 12, 2019

Abstract

We propose an equilibrium model of over-the-counter corporate bond trading with short selling, asymmetric information and dealer inventory costs. The model predicts that higher inventory costs impose implicit short-sale constraints on informed investors and are thus associated with lower price efficiency. We construct bond-level proxies for inventory costs and provide empirical evidence in support of the model’s prediction. Our findings suggest that tighter post-GFC regulation may have had unintended consequences for corporate bond market quality.

Keywords: Corporate Bonds; Securities Lending; Dealer Inventory; Short Selling; Price Efficiency

JEL Classification: G14, G24, G30

Suggested Citation

Berndt, Antje and Zhu, Yichao, Dealer Inventory, Short Interest and Price Efficiency in the Corporate Bond Market (December 12, 2019). Available at SSRN: https://ssrn.com/abstract=3189980 or http://dx.doi.org/10.2139/ssrn.3189980

Antje Berndt (Contact Author)

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Applied Statistics ( email )

Canberra, ACT 0200
Australia

HOME PAGE: http://www.cbe.anu.edu.au/about/staff-directory/?profile=Antje-Berndt

Yichao Zhu

Australian National University (ANU), Research school of Finance, Actuarial Studies and Applied Statistics ( email )

Kingsley Street
Acton
Australia

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