Dealer Quid Pro Quo in the Municipal Bond Market, with Casey Dougal and Daniel Rettl. Last Draft: December 4, 2024

Dealers intermediate trades in OTC markets through trading networks. In the municipal bond market, we document greater complexity than the typical core-periphery structure. Analyzing dealer reciprocity-the tendency to repay favors-we find reciprocity generally reduces markups. Dealers trade lower markups today for future liquidity. However, in small trading communities, reciprocity can foster collusion via quid-pro-quo agreements, inflating transaction chain markups. Among high-centrality dealers in large communities, high reciprocity lowers average markups by 80 basis points, while among low-centrality dealers in small communities, it raises markups by 72 basis points. Although only around 2% of transaction chains suggest collusive behavior, these significantly affect regression results, highlighting the importance of controlling for such outliers to accurately estimate centrality premiums or reciprocity discounts.

Presentations: Virtual Municipal Finance Workshop (2025), 14th Annual Municipal Finance Conference (2025), Southern Finance Conference (2025), Financial Management Association Annual Meeting (2025), German Finance Association (2025)

Related Publications: https://www.bondbuyer.com/news/dealer-quid-pro-quo-shapes-bond-price-markups-paper-says 

Don't Fear the Repo: The Evolution of Bank Behavior in a Post-Crisis Policy Environment, solo-authored

            This paper examines how shifts in banks’ exposure to repo markets and the expansion of deposit franchises have influenced their financial performance and balance sheet strength across three policy regimes: pre-GFC (1994–2007), GFC/ZIRP (2008–2015), and post-GFC (2016–2023). Using linear models, vector autoregressions, and a theoretical framework, I show the shifts in banks' equilibrium behavior based on risk preferences, collateral constraints, and the cost of funding. The lending and financing strategies diverged before the crisis, with risk-seeking banks prioritizing the maximization of their interest income and risk-averse banks benefiting from favorable repo terms by maintaining strong balance sheets. After the crisis, strategies converge as risk-seeking banks shift toward safer short-term funding, while risk-averse banks extend more credit amid diminishing repo market advantages, both of which are likely connected to the low-interest-rate environment. 

Presentations: University of Georgia Brownbag Seminar (2025)

Bonds and Bargains: Effect of New Discount Stores on Municipal Bonds, with John Hund

Did They Actually Say That? Using Large Language Models to Predict FOMC Press Conferences, solo-authored

Wildfires and Municipal Bond Trading, with Daniel Rettl

Do Firms Fulfill Their Synergy Expectations?, with Greg Eaton

Municipal Bond Issuance Money Left On The Table, with Casey Dougal and Richard Ryffel

Market Misreaction? Leverage and Mergers and Acquisitions (2022), with C.N.V. Krishnan. 

Journal of Risk and Financial Management

Using a large database of mergers and acquisitions (M&As) announced from 2010 through 2017, we examine the effects of capital ratio (leverage) on the announcement period stock price reaction as well as on longer-term stock returns and performance, for banks, and compare with non-banks. We find that, for banks, a lower capital ratio of acquirers at the time of the announcement of the M&A is significantly associated with negative announcement-period abnormal returns. However, for these banks, the longer-run abnormal returns and performance are positive. The opposite is true for non-bank M&A announcements: higher equity ratios (lower leverage) of acquirers as at the time of announcement is significantly associated with negative announcement period abnormal returns. But, for such non-banks, the longer-run abnormal returns and performance are positive. This shows that the market may misreact, on average, to both bank and non-bank M&A announcements, based on the acquirer's leverage at the time of announcement.