Dealers' Search Intensity in U.S. Corporate Bond Markets

67 Pages Posted: 1 Aug 2020

See all articles by Shuo Liu

Shuo Liu

Tsinghua University School of Economics and Management

Date Written: July 5, 2020

Abstract

Are dealers' search efforts endogenous in decentralized markets? How do dealers' search efforts affect market efficiency? We propose a model with dealers choosing idiosyncratic search intensities, and estimate the model using transaction data on U.S. corporate bonds. We find that:

[1] with dealers ranked by their private valuations for a bond, the middle-type dealer chooses the highest search intensity, and she reallocates bond positions from lower-type dealers to higher-type dealers;

[2] the estimated model predicts that the search costs and bond mis-allocation in current OTC markets generate 13.7% welfare loss relative to a counterfactual friction-less market.

Keywords: corporate bond market, endogenous search intensity, market inefficiency, search model estimation

JEL Classification: G10, G12, G21

Suggested Citation

Liu, Shuo, Dealers' Search Intensity in U.S. Corporate Bond Markets (July 5, 2020). Available at SSRN: https://ssrn.com/abstract=3644132 or http://dx.doi.org/10.2139/ssrn.3644132

Shuo Liu (Contact Author)

Tsinghua University School of Economics and Management ( email )

Beijing, 100084
China
9192602410 (Phone)

HOME PAGE: http://https://www.shuo-liu.com/

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