Dealer Inventory, Short Interest and Price Efficiency in the Corporate Bond Market
75 Pages Posted: 4 Jun 2018 Last revised: 13 Dec 2019
Date Written: December 12, 2019
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: Suggested Citation