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Market Making and Proprietary Trading in the US Corporate Bond Market

Hugues Dastarac

Working papers from Banque de France

Abstract: I study broker-dealers' trading activity in the US corporate bond market. I find evidence of broker-dealer market making when customers both buy and sell a bond in a day, which happens half of the time: as predicted by market making theories with adverse selection or inventory costs, prices go down (up) as customers sell (buy). Otherwise, evidence is in favor of proprietary trading as in limits of arbitrage theories: prices go up (down) when customers sell (buy), and dealers buy (sell) bonds that are relatively cheap (expensive). Proprietary trading is reduced after the crisis. Relatedly I show that before the crisis, large broker-dealers borrowed and sold Treasury bonds in amounts similar to their corporate bond holding, but not after. I give suggestive evidence that they were subject to a severe tightening of their margin constraints as early as July 2007, in particular following increased Treasury bond volatility.

Keywords: : Credit Spreads; Dealer behavior; corporate bonds; limits of arbitrage; Volcker rule. (search for similar items in EconPapers)
JEL-codes: G20 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2020
New Economics Papers: this item is included in nep-fmk and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:754

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