Size Discount and Size Penalty: Trading Costs in Bond Markets

57 Pages Posted: 22 Apr 2021 Last revised: 6 Sep 2022

See all articles by Gabor Pinter

Gabor Pinter

Bank of England

Chaojun Wang

University of Pennsylvania - The Wharton School

Junyuan Zou


Multiple version iconThere are 2 versions of this paper

Date Written: April 20, 2021


We show that larger trades incur lower trading costs in government bond markets (“size discount”), but costs increase in trade size after controlling for clients’ identities (“size penalty”). The size discount is driven by the cross-client variation of larger traders obtaining better prices, consistent with theories of trading with imperfect competition. The size penalty, driven by within-client variation, is larger for corporate bonds and during major macroeconomic surprises as well as during COVID-19. These differences are larger among more sophisticated clients, consistent with theories of asymmetric information. We propose a trading model with bilateral bargaining and adverse selection to rationalize the co-existence of the size penalty and discount.

Keywords: Trading Costs, Government and Corporate Bonds, Trader Identities, Size Discount, Size Penalty

JEL Classification: G12, G14, G24

Suggested Citation

Pinter, Gabor and Wang, Chaojun and Zou, Junyuan, Size Discount and Size Penalty: Trading Costs in Bond Markets (April 20, 2021). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Available at SSRN: or

Gabor Pinter

Bank of England ( email )

Chaojun Wang (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Junyuan Zou

INSEAD ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex

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