Customer Liquidity Provision: Implications for Corporate Bond Transaction Costs

Jaewon Choi, Yesol Huh () and Sean Seunghun Shin ()
Additional contact information
Yesol Huh: Federal Reserve Board, Washington, District of Columbia 20551
Sean Seunghun Shin: Department of Finance, Aalto University School of Business, 02150 Espoo, Finland

Management Science, 2024, vol. 70, issue 1, 187-206

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.

Keywords: corporate bond liquidity; customer liquidity provision; bank regulations and OTC liquidity; insurer liquidity provision (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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http://dx.doi.org/10.1287/mnsc.2022.4646 (application/pdf)

Related works:
Working Paper: Customer Liquidity Provision: Implications for Corporate Bond Transaction Costs (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:1:p:187-206

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