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Corporate Bond Market Transaction Costs and Transparency

Posted: 27 Dec 2007  

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

Abstract

Using a complete record of U.S. over-the-counter (OTC) secondary trades in corporate bonds, we estimate average transaction costs as a function of trade size for each bond that traded more than nine times between January 2003 and January 2005. We find that transaction costs decrease significantly with trade size. Highly rated bonds, recently issued bonds, and bonds close to maturity have lower transaction costs than do other bonds. Costs are lower for bonds with transparent trade prices, and they drop when the TRACE system starts to publicly disseminate their prices. The results suggest that public traders benefit significantly from price transparency.

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 Transaction Costs and Transparency. Journal of Finance, Vol. 62, No. 3, June 2007. Available at SSRN: https://ssrn.com/abstract=982654

Amy K. 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 S. Piwowar

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

Washington, DC
United States

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