Bond Market Illiquidity: Is Portfolio Trading the Solution?

Authors

Jessica S. Li, University of Chicago - Booth School of BusinessFollow
Maureen O'Hara, Cornell University - Samuel Curtis Johnson Graduate School of Management; Cornell SC Johnson College of BusinessFollow
Andreas C. Rapp, Board of Governors of the Federal Reserve SystemFollow
Xing (Alex) Zhou, Southern Methodist University (SMU) - Finance DepartmentFollow

Publication Date

6-29-2023

Abstract

We examine portfolio trading and its impact on corporate bond liquidity. We establish the scale and scope of this trading innovation, assess its impact on trading costs, delineate the channels through which liquidity effects arise, and identify when they do not. We find that portfolio trading generally improves liquidity. These benefits are driven by dealer characteristics, risk reduction through diversification, and hedging opportunities through ETFs. However, these advantages do not always arise, as portfolio trading can become a costly means of liquidity provision when trades are particularly large or markets falter.

Document Type

Article

Keywords

Bond Portfolio Trading, Liquidity, Corporate Bonds, Corporate Bond Dealers, Financial Innovation

Disciplines

Finance

DOI

10.2139/ssrn.4495516

Source

SMU Cox: Finance (Topic)

Language

English