Journal of Financial Markets (2025) [Link (open access)]

This paper documents coarse pricing by the U.S. Federal Reserve's counterparty intermediaries in QE operations. Although the Fed explicitly sets a tick size of 1/256th in its reverse auctions to purchase Treasury securities, offer prices of primary dealers exhibit strong clustering on coarser grids. Top dealers price more finely, and coarse pricing is particularly prevalent when the security characteristics indicate greater difficulty in precise pricing. I argue that this coarse pricing results from information costs associated with increasing pricing precision. The results also point to a novel role of tick size in affecting dealer competition in central bank operations. 

R&R, Journal of Financial Research

Latest version: June 3, 2025

(Originally circulated: June 21, 2021; revised: September 5, 2023)

(Previous title: Do Firms Cater to Corporate QE? Evidence from the Bank of Japan's Massive Corporate Bond Purchases)

Presented at: U. of Alberta (2021), Waseda U. (2021), Bank of Canada Graduate Student Paper Award Workshop (2021), Nippon Finance Association (Fall, 2021), New Zealand Finance Meeting (2021), and AFA Poster (2022)

In its massive purchases of corporate bonds during the COVID-19 pandemic, the Bank of Japan set the maximum eligible remaining maturity at five years. I document that, during the post-pandemic period, Japanese firms increased issuance of bonds with eligible maturities, but not those with longer, ineligible maturities. These results suggest the demand channel of central bank purchases promoted bond issuance, in contrast to the U.S. experience, where the Federal Reserve launched facilities to purchase similar-maturity corporate bonds. Interestingly, Japanese issuers also increased simultaneous issuances of eligible- and ineligible- maturity bonds, in a manner consistent with mitigating future rollover risk.