Bond Market Structure and Volatility
57 Pages Posted: 22 Apr 2021 Last revised: 29 Apr 2022
Date Written: April 23, 2022
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
Suggested Citation: Suggested Citation