Yalin Gündüz, Loriana Pelizzon, Michael Schneider, Marti G. Subrahmanyam
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Abstract
We study market liquidity in the markets for German and US corporate bonds, providing a comparative analysis of liquidity in two over-the-counter (OTC) bond markets with different characteristics. We employ a unique regulatory dataset of transactions by German financial institutions from 2008 to 2014 to find, first, that overall trading activity is much lower in the German market than in the US. Second, much like in the US, the determinants of German corporate bond liquidity are in line with OTC-market search theories. Third—and surprisingly—frequently traded German bonds have transaction costs that are 39–61 basis points lower than a matched sample of bonds in the US. We relate our results to a number of structural market differences that may explain our findings, including differences in market structure, transparency, and the tax and legal environment.
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The Journal of Fixed Income (JFI) provides sophisticated analytical research and case studies on bond instruments of all types – investment grade, high-yield, municipals, ABSs and MBSs, and structured products like CDOs and credit derivatives. Industry experts offer detailed models and analysis on fixed income structuring, performance tracking, and risk management. JFI keeps you on the front line of fixed income practices by: •Staying current on the cutting edge of fixed income markets •Managing your bond portfolios more efficiently •Evaluating interest rate strategies and manage interest rate risk •Gaining insights into the risk profile of structured products.
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