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Corporate Bond Market Transparency and Transaction Costs

41 Pages Posted: 22 Sep 2004  

Amy K. Edwards

Securities and Exchange Commission (SEC)

Lawrence Harris

University of Southern California - Marshall School of Business - Finance and Business Economics Department; Institute for Quantitative Research in Finance (the Q-Group); Interactive Brokers, Inc. (IBKR); University of Pennsylvania - Financial Economists Roundtable

Michael S. Piwowar

Government of the United States of America - Banking Committee

Date Written: September 21, 2004

Abstract

Using TRACE data - a complete record of all US OTC secondary trades in corporate bonds - we estimate average transaction cost as a function of trade size for each bond that traded more than nine times in 2003. We find that transaction costs are higher than in equities and decrease significantly with trade size. Highly rated bonds, recently issued bonds, and bonds that will soon mature have lower transaction costs than do other bonds. Costs are lower for bonds with publicly disseminated trade prices, and they drop when the TRACE system starts to publicly disseminate their prices. The results suggest that public traders would significantly benefit if bond prices were made more transparent.

Keywords: Corporate bonds, fixed income, liquidity, transaction cost measurement, effective spreads, TRACE, price transparency, market microstructure, dealers

JEL Classification: G14, G18, G24

Suggested Citation

Edwards, Amy K. and Harris, Lawrence and Piwowar, Michael S., Corporate Bond Market Transparency and Transaction Costs (September 21, 2004). Fifteenth Annual Utah Winter Finance Conference. Available at SSRN: https://ssrn.com/abstract=593823 or http://dx.doi.org/10.2139/ssrn.593823

Amy Edwards (Contact Author)

Securities and Exchange Commission (SEC) ( email )

100 F St NE
Washington, DC 20549-1105
United States
202-551-6663 (Phone)

Lawrence Harris

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-6496 (Phone)
213-740-6650 (Fax)

Institute for Quantitative Research in Finance (the Q-Group) ( email )

Q Group
P.O. Box 1540
Valley Stream, NY 11582
United States

Interactive Brokers, Inc. (IBKR) ( email )

209 South LaSalle Street
10th Floor
Chicago, IL 60604
United States

University of Pennsylvania - Financial Economists Roundtable ( email )

Philadelphia, PA
United States

Michael Piwowar

Government of the United States of America - Banking Committee ( email )

Washington, DC
United States

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