Over-the-Counter Market Frictions and Yield Spread Changes
Nils Friewald and
No 13345, CEPR Discussion Papers from C.E.P.R. Discussion Papers
We empirically study whether systematic over-the-counter (OTC) market frictions affect the large unexplained common factor in yield spread changes. Using transactions data on U.S. corporate bonds, we show that measures of marketwide inventory, search, and bargaining frictions reduce the unexplained common component by 19 percentage points. Systematic OTC frictions substantially improve the explanatory power of yield spread changes and account for one-third of their total explained variation. Inventory frictions are equally important in explaining the dynamics of yield spread changes as search and bargaining frictions combined. Our findings support the implications of leading theories of intermediation frictions in OTC markets.
Keywords: Corporate bond market; dealer market; intermediation frictions; Over-the-counter market; yield spread changes (search for similar items in EconPapers)
JEL-codes: G10 G12 G20 (search for similar items in EconPapers)
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