Working Papers

Intermediary Balance Sheet Constraints, Bond Mutual Funds' Strategies, and Bond Returns (with Mariassunta Giannetti, Andreas Rapp, and Martin Waibel), July 2024.

We show that after the introduction of the leverage ratio constraints on bank-affiliated dealers, bond mutual funds have engaged in more liquidity provision in investmentgrade corporate bonds and that the performance of funds with liquidity-supplying strategies has benefited. Not only have regulations transferred profits associated with liquidity provision in the corporate bond market to mutual funds, but the liquidity and returns of investment-grade corporate bonds have become more exposed to redemptions from the bond mutual fund industry, suggesting that the regulations have made investment-grade corporate bonds more volatile. Accordingly, we observe that investment-grade corporate bonds that are more exposed to leverage ratio constraints experienced a more severe deterioration in liquidity and returns at the onset of the COVID-19 pandemic.

Dealer Specialization and Market Segmentation (with Christian Lundblad and Jinming Xue), June 2024.

Winner of Best Paper Award at 2024 China International Conference in Finance

Using machine learning techniques, we uncover an important number of dealers in the U.S. municipal bond market who focus on geographically adjacent states, a characteristic distinct from dealer centrality. These "specialized" dealers enjoy larger market shares in states with greater local ownership and in local bonds with more complex features. We also find that trades intermediated by these specialized dealers have significantly larger markups than those intermediated by national dealers. For the average retail trade, about two-thirds of the differential markup is attributed to rent, with the remaining third to the unique benefits of specialization. Only the latter matters for institution-sized trades. Together, these results suggest that specialized dealers possess some monopoly power yet also provide important differentiated services. Specialized dealers provide immediacy, reward customers with an allocation of new bond offerings, help customers overcome information frictions, and facilitate access to local investor clientele. The latter two account for the bulk of the specialization benefits. Over time, as transparency improves and local ownership declines, the average market share of specialized dealers decreases along with differential markups.

Does Search Friction Really Matter? Evidence from the Corporate Bond Market, May 2009 (permanent working paper).

Winner of BGI Award for Best Paper by a Ph.D. Candidate at 2007 European Finance Association Meetings

This paper provides empirical evidence for the importance of costly search in decentralized financial markets. Investors face a trade-off between information gathering costs and improved pricing. Significant search costs lead to a less exhaustive search and thus imperfect information. In equilibrium, dealers earn rents and trades are not necessarily executed at the best available price. Using corporate bond transaction data, I find that trade prices vary considerably for the same bond and on the same day. In the world of perfect information, the documented price dispersion is too large to be justified by either intraday price movements or dealer differences. The cross-sectional patterns of trading costs are consistent with the predictions of costly search models, based on the premise that investors’ incentives to price-shop increase with trade size. Both mean and dispersion of spreads decline with trade size after controlling for the impact of fixed costs, trading relationships, and investor sophistication. My findings support the theoretical predictions of Yin (JF, 2005) that quotation transparency (which reduces search costs) will lead to more competitive markets and better risk sharing among dealers.