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Dealer intermediation and price behavior in the aftermarket for new bond issues

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  • Green, Richard C.
  • Hollifield, Burton
  • Schurhoff, Norman

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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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 86 (2007)
Issue (Month): 3 (December)
Pages: 643-682

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Handle: RePEc:eee:jfinec:v:86:y:2007:i:3:p:643-682

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Web page: http://www.elsevier.com/locate/inca/505576

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References

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  1. Shilony, Yuval, 1977. "Mixed pricing in oligopoly," Journal of Economic Theory, Elsevier, vol. 14(2), pages 373-388, April.
  2. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 955-69, July.
  3. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
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Citations

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Cited by:
  1. Ronen, Tavy & Zhou, Xing, 2013. "Trade and information in the corporate bond market," Journal of Financial Markets, Elsevier, vol. 16(1), pages 61-103.
  2. Jankowitsch, Rainer & Nashikkar, Amrut & Subrahmanyam, Marti G., 2011. "Price dispersion in OTC markets: A new measure of liquidity," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 343-357, February.
  3. Tarun Ramadorai, 2008. "What determines transaction costs in foreign exchange markets?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 14-25.
  4. Konstantin Milbradt & Zhiguo He, 2012. "Endogenous liquidity and defaultable bonds," 2012 Meeting Papers, Society for Economic Dynamics 86, Society for Economic Dynamics.
  5. Schultz, Paul, 2012. "The market for new issues of municipal bonds: The roles of transparency and limited access to retail investors," Journal of Financial Economics, Elsevier, Elsevier, vol. 106(3), pages 492-512.
  6. Cestau, Dario & Green, Richard C. & Schürhoff, Norman, 2013. "Tax-subsidized underpricing: The market for Build America Bonds," Journal of Monetary Economics, Elsevier, Elsevier, vol. 60(5), pages 593-608.
  7. Ricardo Lagos & Guillaume Rocheteau, 2008. "Liquidity in asset markets with search frictions," Staff Report, Federal Reserve Bank of Minneapolis 408, Federal Reserve Bank of Minneapolis.
  8. Carlin, Bruce I., 2009. "Strategic price complexity in retail financial markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 91(3), pages 278-287, March.
  9. Andrew Ang & Vineer Bhansali & Yuhang Xing, 2008. "Taxes on Tax-Exempt Bonds," NBER Working Papers 14496, National Bureau of Economic Research, Inc.
  10. Friewald, Nils & Jankowitsch, Rainer & Subrahmanyam, Marti G., 2014. "To disclose or not to disclose: Transparency and liquidity in the structured product market," CFS Working Paper Series 461, Center for Financial Studies (CFS).
  11. Bruce I. Carlin & Simon Gervais, 2009. "Legal Protection in Retail Financial Markets," NBER Working Papers 14972, National Bureau of Economic Research, Inc.
  12. Lester, Benjamin & Rocheteau, Guillaume & Weill, Pierre-Olivier, 2014. "Competing for order flow in OTC markets," Working Papers 14-9, Federal Reserve Bank of Philadelphia.
  13. Bruno Biais & Richard C. Green, . "The Microstructure of the Bond Market in the 20th Century," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 2005-E57, Carnegie Mellon University, Tepper School of Business.
  14. Ellul, Andrew & Jotikasthira, Chotibhak & Lundblad, Christian T., 2011. "Regulatory pressure and fire sales in the corporate bond market," Journal of Financial Economics, Elsevier, Elsevier, vol. 101(3), pages 596-620, September.
  15. McConnell, John J. & Saretto, Alessio, 2010. "Auction failures and the market for auction rate securities," Journal of Financial Economics, Elsevier, Elsevier, vol. 97(3), pages 451-469, September.
  16. Song Han & Dan Li, 2011. "The Fragility of Discretionary Liquidity Provision: Lessons from the Collapse of the Auction Rate Securities Market," Working Papers 052011, Hong Kong Institute for Monetary Research.
  17. Ramadorai, Tarun, 2006. "Persistence, Performance and Prices in Foreign Exchange Markets," CEPR Discussion Papers 5861, C.E.P.R. Discussion Papers.
  18. Francis A. Longstaff, 2009. "Municipal Debt and Marginal Tax Rates: Is there a Tax Premium in Asset Prices?," NBER Working Papers 14687, National Bureau of Economic Research, Inc.
  19. Zhiguo He & Konstantin Milbradt, 2012. "Endogenous Liquidity and Defaultable Bonds," NBER Working Papers 18408, National Bureau of Economic Research, Inc.
  20. Song Han & Dan Li, 2010. "The fragility of discretionary liquidity provision - lessons from the collapse of the auction rate securities market," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2010-50, Board of Governors of the Federal Reserve System (U.S.).

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