The Effects of Transparency on Trading Profits and Price Informativeness: Evidence From Corporate Bonds

35 Pages Posted: 12 Dec 2018

See all articles by Ryan Lewis

Ryan Lewis

University of Colorado, Boulder

Michael Schwert

University of Pennsylvania - The Wharton School

Date Written: November 18, 2018

Abstract

This paper examines the effects of post-trade price transparency on the allocation of trading surplus in the corporate bond market. Using the introduction of TRACE as a natural experiment, we show that dealer profits are unconditionally lower when trade prices are disseminated. However, conditional on facing a customer imbalance, dealers perform better when trades are published because they can use that information to adjust prices more quickly to their future level. We provide evidence that prices are less informative after TRACE, consistent with price transparency reducing incentives for informed traders to participate in the market.

Keywords: over-the-counter markets, price transparency, corporate bonds

JEL Classification: G12, G14, G23

Suggested Citation

Lewis, Ryan and Schwert, Michael, The Effects of Transparency on Trading Profits and Price Informativeness: Evidence From Corporate Bonds (November 18, 2018). Available at SSRN: https://ssrn.com/abstract=3286731 or http://dx.doi.org/10.2139/ssrn.3286731

Ryan Lewis

University of Colorado, Boulder ( email )

Boulder, CO 80309-0419
United States

Michael Schwert (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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