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

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Author Info
Richard Green
Burton Hollifield
Norman Schurhoff

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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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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2005-E56.

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Handle: RePEc:cmu:gsiawp:277024966

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Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
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  1. Bruce I. Carlin & Simon Gervais, 2009. "Legal Protection in Retail Financial Markets," NBER Working Papers 14972, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. Biais, Bruno & Green, Richard, 2007. "The Microstructure of the Bond Market in the 20th Century," IDEI Working Papers 482, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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  4. Ramadorai, Tarun, 2006. "Persistence, Performance and Prices in Foreign Exchange Markets," CEPR Discussion Papers 5861, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. 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. [Downloadable!]
  6. Andrew Ang & Vineer Bhansali & Yuhang Xing, 2008. "Taxes on Tax-Exempt Bonds," NBER Working Papers 14496, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Ricardo Lagos & Guillaume Rocheteau, 2007. "Liquidity in asset markets with search frictions," Working Paper 0706, Federal Reserve Bank of Cleveland. [Downloadable!]
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