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The Microstructure of the Bond Market in the 20th Century

  • Bruno Biais
  • Richard C. Green

Bonds are traded in OTC markets, where opacity and fragmentation imply large transaction costs for retail investors. Is there something special about bonds, in contrast to stocks, that precludes trading in transparent, limit-order markets? Historical experience suggests this is not the case. Before WWII, there was an active market in corporate and municipal bonds on the NYSE. Activity dropped dramatically, in the late 1920s for municipals and in the mid 1940s for corporate, as trading migrated to the OTC market. This migration occurred simultaneously with an increase in the role of institutional investors, which fare better than retail investors in OTC market. Based on current and historical high frequency data, we find that, for retail investors, trading costs in municipal bonds were half as large in 1926-1927 as they are now. The difference in transactions costs is likely to reflect the difference in market structures.

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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2005-E57.

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Handle: RePEc:cmu:gsiawp:2073810639
Contact details of provider: Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Web page: http://www.tepper.cmu.edu/

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  9. Biais, Bruno & Glosten, Larry & Spatt, Chester, 2004. "Market Microstructure: A Survey of Microfoundations, Empirical Results, and Policy Implications," IDEI Working Papers 253, Institut d'Économie Industrielle (IDEI), Toulouse.
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