Size Discount and Size Penalty Trading Costs in Bond Markets

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

No 2114, Discussion Papers from Centre for Macroeconomics (CFM)

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 and during major macroeconomic surprises as well as during COVID-19. These differences are larger among more sophisticated clients, consistent with theories of asymmetric information. We propose a trading model with bilateral bargaining and adverse selection to rationalise the co-existence of the size penalty and discount.

Keywords: Trading Costs; Government and Corporate Bonds; Trader Identities; Size Discount; Size Penalty (search for similar items in EconPapers)
JEL-codes: G12 G14 G24 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2021-04
New Economics Papers: this item is included in nep-cfn and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Size Discount and Size Penalty: Trading Costs in Bond Markets (2024)
Working Paper: Size discount and size penalty: trading costs in bond markets (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:cfm:wpaper:2114

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