Dealer Intermediation and Price Behavior in the Aftermarket for New Bond Issues

54 Pages Posted: 17 Jun 2006  

Richard C. Green

Carnegie Mellon University - David A. Tepper School of Business

Burton Hollifield

Carnegie Mellon University - David A. Tepper School of Business

Norman Schürhoff

University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Date Written: June 2006

Abstract

We study trading and prices in newly issued municipal bonds. Municipals, which trade in decentralized, broker-dealer markets, are underpriced when issued, but unlike equities the average price rises slowly over a period of several days. We document high levels of price dispersion in newly issued bonds, and show that the average drift upward in price is because of changes in the mix of trades over time. While large trades occur close to the reoffering price, and close to each other, small trades occur at a wide range of prices almost simultaneously. Some small investors appear to be informed about the status of the issue, and trade on attractive terms. Others appear uninformed,and often buy at prices as much as five percent above the reoffering price, at which informed traders buy. We estimate a mixed-distribution model that highlights ex-ante characteristics that discriminate between these types of investors, and quantifies the losses uninformed traders or issuers give up to broker dealers.

Keywords: market microstructure, municipal bonds, trading, price dispersion

JEL Classification: G14

Suggested Citation

Green, Richard C. and Hollifield, Burton and Schürhoff, Norman, Dealer Intermediation and Price Behavior in the Aftermarket for New Bond Issues (June 2006). EFA 2006 Zurich Meetings Paper. Available at SSRN: https://ssrn.com/abstract=909352 or http://dx.doi.org/10.2139/ssrn.909352

Richard C. Green

Carnegie Mellon University - David A. Tepper School of Business ( email )

315B Schenley Park
Pittsburgh, PA 15213-3890
United States
412-268-2302 (Phone)
412-268-7064 (Fax)

Burton Hollifield (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
(412) 268-6505 (Phone)
(412) 268-6837 (Fax)

Norman Schürhoff

University of Lausanne ( email )

Extranef 228
CH-1015 Lausanne
Switzerland
+41 (0)21 692 3447 (Phone)
+41 (0)21 692 3435 (Fax)

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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