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Bond Losses and Systemic Risk

Author

Listed:
  • Klenio Barbosa
  • Dakshina De Silva
  • Liyu Yang
  • Hisayuki Yoshimoto

Abstract

This paper documents the existence of primary dealers' losses in Treasury bond markets and investigates how these losses affect dealers' market value. Using a novel data set that tracks more than 2,350 primary-to-secondary transactions, we find that bond losses for primary dealers are prevalent and were severe during the financial crisis. Our results indicate that liquidity constraints are a major source of bond losses observed in primary-to-secondary trades. We also find that financial sector value is correlated with these losses. Using an alternating market experiment, we show that bond losses are higher under discriminatory auctions as compared to uniform auctions.

Suggested Citation

  • Klenio Barbosa & Dakshina De Silva & Liyu Yang & Hisayuki Yoshimoto, 2020. "Bond Losses and Systemic Risk," Working Papers 288072615, Lancaster University Management School, Economics Department.
    • Handle: RePEc:lan:wpaper:288072615
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    File URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/LancasterWP2020_001.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Bond Losses; Treasury Bonds; Liquidity Constraint; Auction Mechanisms;
    All these keywords.

    JEL classification:

    • C57 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Econometrics of Games and Auctions
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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