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Size discount and size penalty: trading costs in bond markets

Gabor Pinter, Chaojun Wang () and Junyuan Zou ()
Additional contact information
Chaojun Wang: The Wharton School
Junyuan Zou: INSEAD

No 970, Bank of England working papers from Bank of England

Abstract: We show that larger trades incur lower trading costs in government bond markets (‘size discount’), but costs increase in trade size after controlling for clients’ identities (‘size penalty’). The size discount is driven by the cross‑client variation of larger traders obtaining better prices, consistent with theories of trading with imperfect competition. The size penalty, driven by the within‑client variation, is larger for corporate bonds, during major macroeconomic surprises and during Covid‑19. These differences are larger among more sophisticated clients, consistent with information‑based theories. The size penalty in US Treasuries is about three times as small as in UK gilts.

Keywords: Trading costs; trade size; government and corporate bonds; trader identities (search for similar items in EconPapers)
JEL-codes: G12 G14 G24 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2022-04-08
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-mst
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