Lighting up the Dark: Liquidity in the German Corporate Bond Market

61 Pages Posted: 5 Oct 2018

See all articles by Yalin Gündüz

Yalin Gündüz

Deutsche Bundesbank

Giorgio Ottonello

Vienna Graduate School of Finance (VGSF)

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE; Ca Foscari University of Venice

Michael Schneider

Deutsche Bundesbank; Scuola Normale Superiore

Marti G. Subrahmanyam

New York University - Stern School of Business

Date Written: September 17, 2018

Abstract

We study the impact of transparency on liquidity in OTC markets. We do so by providing an analysis of liquidity in a corporate bond market without trade transparency (Germany), and comparing our findings to a market with full post-trade disclosure (the U.S.). We employ a unique regulatory dataset of transactions of German financial institutions from 2008 until 2014 to find that: First, overall trading activity is much lower in the German market than in the U.S. Second, similar to the U.S., the determinants of German corporate bond liquidity are in line with search theories of OTC markets. Third, surprisingly, frequently traded German bonds have transaction costs that are 39-61 bp lower than a matched sample of bonds in the U.S. Our results support the notion that, while market liquidity is generally higher in transparent markets, a sub-set of bonds could be more liquid in more opaque markets because of investors "crowding" their demand into a small number of more actively traded securities.

Keywords: Corporate Bonds, WpHG, Liquidity, Transparency, OTC markets

JEL Classification: G15

Suggested Citation

Gündüz, Yalin and Ottonello, Giorgio and Pelizzon, Loriana and Schneider, Michael and Subrahmanyam, Marti G., Lighting up the Dark: Liquidity in the German Corporate Bond Market (September 17, 2018). SAFE Working Paper No. 230. Available at SSRN: https://ssrn.com/abstract=3253000 or http://dx.doi.org/10.2139/ssrn.3253000

Yalin Gündüz

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Giorgio Ottonello

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Loriana Pelizzon (Contact Author)

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Goethe University Frankfurt - Research Center SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Michael Schneider

Deutsche Bundesbank

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Scuola Normale Superiore ( email )

Piazza dei Cavalieri, 7
Pisa, 56126
Italy

Marti G. Subrahmanyam

New York University - Stern School of Business ( email )

Stern School of Business,
44 West 4th Street, Suite 9-68
New York, NY 10012-1126
United States
212-998-0348 (Phone)
212-995-4233 (Fax)

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