Customer Liquidity Provision: Implications for Corporate Bond Transaction Costs
Jaewon Choi, Yesol Huh, Sean Seunghun Shin
Management Science · 2024 · Volume 70 · Issue 1
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. This paper was accepted by Bruno Biais, finance. Supplemental Material: The internet appendix and data are available at https://doi.org/10.1287/mnsc.2022.4646 .
Keywords
corporate bond liquidity, customer liquidity provision, bank regulations and OTC liquidity, insurer liquidity provision
Enable JavaScript for citation tools and additional paper interactions.