Bond Market Structure and Volatility

Abstract

We apply 24-hour variance ratio methodology to examine dealers’ behavior and pricing process in corporate bond markets. We find that the open-to-open return volatility is on average higher than the close-to-close return volatility. This implies that the information processing during the market open affects the price volatility of the bond markets. We find that the cause of the high volatility during the market open is from the monopolistic power of the corporate bond dealers evidenced by the lower variance ratios after we introduce the Volcker Rule as an exogenous shock.

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

JEL Classification: G12, G14