Bond Losses in Post-Auction Resale Markets and Systemic Risk

This paper estimates the relationship primary-dealers returns in post-auction resale markets for treasury bonds and financial systemic risk. Using a novel data set that tracks more than 2,350 primary-to-secondary transactions, we find that bond losses for primary dealers are prevalent and were severe during the financial crisis. Our results indicate that liquidity constraints are a major source of bond losses observed in primary-to-secondary trades. We also find that financial sector value is correlated with these losses. Using an alternating market experiment, we show that bond losses are higher under discriminatory auctions as compared to uniform auctions.

Keywords: Bond Losses, Treasury Bonds, Systemic Risk, Auction Mechanisms.

JEL Classification: C57, C58, D44, G1, G2, L0

Suggested Citation: Suggested Citation

Barbosa, Klenio and De Silva, Dakshina G. and Yang, Liyu and Yoshimoto, Hisayuki, Bond Losses in Post-Auction Resale Markets and Systemic Risk (April 27, 2022). Available at SSRN: https://ssrn.com/abstract=3512531 or http://dx.doi.org/10.2139/ssrn.3512531