Lighting Up the Dark: Liquidity in the German Corporate Bond Market

1 Pages Posted: 29 Jul 2021

See all articles by Yalin Gündüz

Yalin Gündüz

Deutsche Bundesbank

Michael Schneider

Deutsche Bundesbank; Goethe University Frankfurt

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice - Dipartimento di Economia

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business

Date Written: 2021

Abstract

We study the impact of transparency on liquidity in OTC markets. We do so by providing an analysis of liquidity in a corporate bond market without trade transparency (Germany), and comparing our findings to a market with full posttrade disclosure (the U.S.). We employ a unique regulatory dataset of transactions of German financial institutions from 2008 until 2014 to find that: First, overall trading activity is much lower in the German market than in the U.S. Second, similar to the U.S., the determinants of German corporate bond liquidity are in line with search theories of OTC markets. Third, surprisingly, frequently traded German bonds have transaction costs that are 39-61 bp lower than a matched sample of bonds in the U.S. Our results support the notion that, while market liquidity is generally higher in transparent markets, a subset of bonds could be more liquid in more opaque markets because of investors "crowding" their demand into a small number of more actively traded securities.

JEL Classification: G15

Suggested Citation

Gündüz, Yalin and Schneider, Michael and Pelizzon, Loriana and Subrahmanyam, Marti G., Lighting Up the Dark: Liquidity in the German Corporate Bond Market (2021). Deutsche Bundesbank Discussion Paper No. 21/2021, Available at SSRN: https://ssrn.com/abstract=3895495 or http://dx.doi.org/10.2139/ssrn.3895495

Yalin Gündüz (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Michael Schneider

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Goethe University Frankfurt

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

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