Informed Trading and the Dynamics of Client-dealer Connections in Corporate Bond Markets
99 Pages Posted: 8 Dec 2020 Last revised: 22 Jan 2022
Date Written: January 19, 2022
Using a unique regulatory dataset with disclosed counterparty identities, we show that clients in corporate bond markets outperform when they trade with more dealers. The effect is stronger for informationally sensitive clients, assets, and during informationally intensive periods including Covid-19. Identifying clients who simultaneously trade in government and corporate bonds reveals that connections have larger and more persistent effects in the corporate bond market. Using a Kyle (1989)-type model, we show that both the degree of inter-dealer competition and the magnitude of private information could explain the strength of the performance-connection relation; we find stronger empirical evidence for an information-based mechanism.
Keywords: Informed Trading, Corporate Bonds, OTC Markets, Client-Dealer Connections, Inter-Dealer Competition, COVID-19
JEL Classification: G12, G14, G23, G24
Suggested Citation: Suggested Citation