Relationship Discounts in Corporate Bond Trading

46 Pages Posted: 23 Dec 2022 Last revised: 9 Oct 2023

See all articles by Simon Jurkatis

Simon Jurkatis

Bank of England

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department; Centre for Economic Policy Research (CEPR); University of Tuebingen

Karamfil Todorov

Bank for International Settlements

Nicholas Vause

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: October 6, 2023

Abstract

We find that clients with stronger past trading relationships with a dealer receive consistently better prices in corporate bond trading. The top 1% of relationship clients enjoy transaction costs that are 51% lower than those of the median client—an effect which was particularly beneficial when transaction costs spiked during the COVID-19 turmoil. We find clients’ liquidity provision to be a key motive why dealers grant relationship discounts: clients to whom balance-sheet constrained dealers can turn as a source of liquidity are rewarded with relationship discounts. Another important motive for dealers to give discounts to relationship clients is because these clients generate the bulk of dealers’ profits. Finally, we find no evidence that extraction of information from clients’ order flow is
related to relationship discounts.

Keywords: Corporate bonds, COVID-19, Dealers, Over-the-counter markets, Trading relationships

JEL Classification: G12, G14, G23, G24

Suggested Citation

Jurkatis, Simon and Schrimpf, Andreas and Todorov, Karamfil and Vause, Nicholas, Relationship Discounts in Corporate Bond Trading (October 6, 2023). Available at SSRN: https://ssrn.com/abstract=4301416 or http://dx.doi.org/10.2139/ssrn.4301416

Simon Jurkatis (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

University of Tuebingen ( email )

Wilhelmstr. 19
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

Karamfil Todorov

Bank for International Settlements ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Nicholas Vause

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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