Dealers' Market Power in the Corporate Bond Market

Abstract

We apply 24-hour variance ratio methodology to examine dealers’ behavior and pricing process in corporate bond markets. We find that corporate bond dealers exert significant market power deviating bond prices from their equilibrium. Dealers extract greater rents at the market open than at the market close. Dealers exert market power less when the volume and credit rating are low. Consistent with the literature, the results show that dealers strategically unload risky assets and take on safer assets. We confirm our results using the Volcker Rule as an exogenous shock.

Keywords: Fixed income, market microstructure, variance ratios, corporate bonds, bond dealers, monopolistic power

JEL Classification: G12, G14