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The Same Bond at Different Prices: Identifying Search Frictions and Selling Pressures

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  • Peter Feldhütter

Abstract

I propose a new measure that identifies when the market price of an over-the-counter traded asset is below its fundamental value due to selling pressure. The measure is the difference between prices paid by small traders and those paid by large traders. In a model for over-the-counter trading with search frictions and periods with selling pressures, I show that this measure identifies liquidity crises (i.e., high number of forced sellers). Using a structural estimation, the model is able to identify liquidity crises in the U.S. corporate bond market based on the relative prices paid by small and large traders. New light is shed on two crises, the downgrade of General Motors and Ford in 2005 and the subprime crisis The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

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  • Peter Feldhütter, 2012. "The Same Bond at Different Prices: Identifying Search Frictions and Selling Pressures," Review of Financial Studies, Society for Financial Studies, vol. 25(4), pages 1155-1206.
  • Handle: RePEc:oup:rfinst:v:25:y:2012:i:4:p:1155-1206
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    File URL: http://hdl.handle.net/10.1093/rfs/hhr093
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    Cited by:

    1. Andrew Ellul & Chotibhak Jotikasthira & Christian T. Lundblad & Yihui Wang, 2014. "Is Historical Cost Accounting a Panacea? Market Stress, Incentive Distortions, and Gains Trading," CSEF Working Papers 375, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    2. Segura, Anatoli & Suarez, Javier, 2016. "How Excessive Is Banks' Maturity Transformation?," CEPR Discussion Papers 11111, C.E.P.R. Discussion Papers.
    3. Greenwood, Robin & Landier, Augustin & Thesmar, David, 2015. "Vulnerable banks," Journal of Financial Economics, Elsevier, vol. 115(3), pages 471-485.
    4. Lin, Hai & Wang, Junbo & Wu, Chunchi, 2014. "Predictions of corporate bond excess returns," Journal of Financial Markets, Elsevier, vol. 21(C), pages 123-152.
    5. Jacob Boudoukh & Jordan Brooks & Matthew Richardson & Zhikai Xu, 2016. "The Complexity of Liquidity: The Extraordinary Case of Sovereign Bonds," NBER Working Papers 22576, National Bureau of Economic Research, Inc.
    6. Song Han & Hao Zhou, 2016. "Effects of Liquidity on the Non-Default Component of Corporate Yield Spreads: Evidence from Intraday Transactions Data," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 6(03), pages 1-49, September.
    7. Shen, Ji & Wei, Bin & Yan, Hongjun, 2016. "Financial Intermediation Chains in an OTC Market," MPRA Paper 74925, University Library of Munich, Germany.
    8. Pan, Kevin & Zeng, Yao, 2017. "ETF arbitrage under liquidity mismatch," ESRB Working Paper Series 59, European Systemic Risk Board.
    9. repec:wsi:rpbfmp:v:20:y:2017:i:02:n:s0219091517500084 is not listed on IDEAS
    10. Ellul, Andrew & Jotikasthira, Chotibhak & Lundblad, Christian T & Wang, Yihui, 2015. "Is Historical Cost Accounting a Panacea? Market Stress, Incentive Distortions, and Gains Trading," CEPR Discussion Papers 10450, C.E.P.R. Discussion Papers.

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