Bond Losses and Systemic Risk
63 Pages Posted: 17 Jan 2020 Last revised: 21 Feb 2021
Date Written: January 19, 2020
This paper documents the existence of primary dealers’ losses in Treasury bond markets and investigates how these losses a¤ect dealers’ market value. 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: Treasury Auctions, Bond Losses, Discriminatory vs Uniform-Price Auctions
JEL Classification: C57, C58, D44.
Suggested Citation: Suggested Citation