Size Discount and Size Penalty: Trading Costs in Bond Markets

56 Pages Posted: 4 May 2022

See all articles by Gabor Pinter

Gabor Pinter

Bank of England

Chaojun Wang

University of Pennsylvania - The Wharton School

Junyuan Zou

INSEAD

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Date Written: April 8, 2022

Abstract

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 the within‑client variation, is larger for corporate bonds, during major macroeconomic surprises and during Covid‑19. These differences are larger among more sophisticated clients, consistent with information‑based theories. The size penalty in US Treasuries is about three times as small as in UK gilts.

Keywords: Trading costs, trade size, government and corporate bonds, trader identities

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 8, 2022). Bank of England Working Paper No. 970, 2022, Available at SSRN: https://ssrn.com/abstract=4083170 or http://dx.doi.org/10.2139/ssrn.4083170

Gabor Pinter (Contact Author)

Bank of England ( email )

Chaojun Wang

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
France

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