Corporate Bond Dealers' Inventory Risk and FOMC

Alessio Ruzza and Wojciech Zurowski
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Alessio Ruzza: University of Lugano and Swiss Finance Institute
Wojciech Zurowski: University of Lugano and Swiss Finance Institute

No 17-68, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Macroeconomic announcements increase trading activity, with potential consequences for liquidity. This paper studies the effect of FOMC announcements on the US corporate bond market liquidity. The releases do not seem to create adverse selection. We obtain the probability distribution of monetary policy outcomes from 30 day Fed funds Futures. Despite the low toxicity of the order flow, dealers increase the price for liquidity provision in the presence of monetary policy uncertainty and unexpected Fed rate changes. Trading costs decomposition reveals that inventory risk aversion drives the dealers' behaviour. We conclude that a dealership market falls short around macroeconomic announcements, even when adverse selection may be absent.

Keywords: corporate bond market; inventory risk; FOMC; Fed funds futures (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2017-05
New Economics Papers: this item is included in nep-cfn, nep-mac, nep-mon and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1768

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