Customer Liquidity Provision: Implications for Corporate Bond Transaction Costs
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Journal Title
Journal ISSN
Volume Title
A1 Alkuperäisartikkeli tieteellisessä aikakauslehdessä
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Author
Date
2024-01
Major/Subject
Mcode
Degree programme
Language
en
Pages
21
Series
Management Science
Abstract
The convention when calculating corporate bond trading costs is to estimate bid–ask spreads that customers pay, implicitly assuming that dealers always provide liquidity to customers. We show that, contrary to this assumption, customers increasingly provide liquidity following the adoption of post-2008 banking regulations, and thus, conventional bid–ask spread measures underestimate the cost of dealers’ liquidity provision. Among large trades wherein dealers use inventory capacity, customers pay 40%–60% wider spreads than before the crisis. Customers’ balance-sheet capacity and their trading relationships with dealers are important determinants of customer liquidity provision.Description
Keywords
Bank regulations and OTC liquidity, Corporate bond liquidity, Customer liquidity provision, Insurer liquidity provision
Other note
Citation
Choi , J , Huh , Y & Shin , S 2024 , ' Customer Liquidity Provision: Implications for Corporate Bond Transaction Costs ' , Management Science , vol. 70 , no. 1 , pp. 187-206 . https://doi.org/10.1287/mnsc.2022.4646
