Dealer Intermediation and Price Behavior in the Aftermarket for New Bond Issues

Richard Green, Burton Hollifield () and Norman Schurhoff
Authors registered in the RePEc Author Service: Norman Schuerhoff

No 2005-E56, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: We study trading and prices in newly issued municipal bonds. Municipals, which trade in decentralized, broker-dealer markets, are underpriced when issued, but unlike equities the average price rises slowly over a period of several days. We document high levels of price dispersion in newly issued bonds, and show that the average drift upward in price is because of changes in the mix of trades over time. While large trades occur at prices close to the reoffering yield, and close to each other, small trades occur at a wide range of prices almost simultaneously. Some small investors appear to be informed about the status of the issue, and trade on attractive terms. Others appear uninformed, and broker/dealers are able to discriminate between them.

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Journal Article: Dealer intermediation and price behavior in the aftermarket for new bond issues (2007)
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