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Corporate Bond Market Transaction Costs and Transparency
Author(s) -
EDWARDS AMY K.,
HARRIS LAWRENCE E.,
PIWOWAR MICHAEL S.
Publication year - 2007
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2007.01240.x
Subject(s) - bond , transparency (behavior) , transaction cost , business , database transaction , monetary economics , maturity (psychological) , corporate bond , price discovery , bond market , economics , financial system , finance , database , computer science , law , computer security , futures contract , political science
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.