Download This PaperBond Market Illiquidity: Is Portfolio Trading the Solution?
This paper subsumes Li (2022) "Frictional Intermediation, Inventory Hedging, and the Rise of Portfolio Trading in the Corporate Bond Market" (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4053987)
63 Pages Posted: 3 Jul 2023 Last revised: 11 Feb 2025
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Bond Market Illiquidity: Is Portfolio Trading the Solution?
Frictional Intermediation, Inventory Hedging, and the Rise of Portfolio Trading in the Corporate Bond Market
Date Written: June 29, 2023
Abstract
We examine portfolio trading and its impact on corporate bond liquidity. We establish the scale and scope of this trading innovation, assess its impact on trading costs, delineate the channels through which liquidity effects arise, and identify when they do not. We find that portfolio trading generally improves liquidity. These benefits are driven by dealer characteristics, risk reduction through diversification, and hedging opportunities through ETFs. However, these advantages do not always arise, as portfolio trading can become a costly means of liquidity provision when trades are particularly large or markets falter.
Keywords: Bond Portfolio Trading, Liquidity, Corporate Bonds, Corporate Bond Dealers, Financial Innovation
JEL Classification: G01, G10, G12, G20, G23, G24
Suggested Citation: Suggested Citation
Maureen O'Hara
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)
Andreas C. Rapp
Board of Governors of the Federal Reserve System ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
HOME PAGE: http://https://www.federalreserve.gov/econres/andreas-c-rapp.htm
