Dealer Intermediation and Price Behavior in the Aftermarket for New Bond Issues

By Richard C. Green, Burton Hollifield, N. Schürhoff. 2006

197 citations recorded by the source corpus.

We study trading and prices in newly issued municipal bonds. Municipals, which trade in decentralized, broker-dealer markets, are underpriced when issued, but unlike equities the average price rises slowly over a period of several days. We document high levels of price dispersion in newly issued bonds, and show that the average drift upward in price is because of changes in the mix of trades over time. While large trades occur close to the reoffering price, and close to each other, small trades occur at a wide range of prices almost simultaneously. Some small investors appear to be informed about the status of the issue, and trade on attractive terms. Others appear uninformed,and often buy at prices as much as five percent above the reoffering price, at which informed traders buy. We estimate a mixed-distribution model that highlights ex-ante characteristics that discriminate between these types of investors, and quantifies the losses uninformed traders or issuers give up to broker dealers.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/4837b8cc082309458ffadfa2ff5ed6f3275c1d60

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Citations in the corpus

Liquidity in asset markets with search frictions (2007, background): “Definition 1 An equilibrium is a time-path h{ai(t)}, q(t), p(t), {φi(a, t)},Hti that satisfies (12), (14), (15), (17) and (18), given an initial condition H0.”
Asset Price Dynamics with Slow-Moving Capital (2010, background): “…in the degree of heterogeneity across investors of execution prices, is given in various settings by Ashcraft and Duffie (2007), Goldstein, Hotchkiss, and Sirri (2007), Green, Hollifield, and Schürhoff (2007b), Green, Hollifield, and Schürhoff (2007a), and Green, Li, and Schürhoff (2008).”
Click or Call? Auction versus Search in the Over‐the‐Counter Market (2012, unknown): “Green, Hollifield, and Schürhoff (2007) develop and estimate a structural model of bargaining between dealers and customers and conclude that dealers exercise substantial market power.”
The Same Bond at Different Prices: Identifying Search Frictions and Selling Pressures (2012, unknown): “…given point in time are dispersed and that bid-ask spreads decrease in trade size and overwhelming support is found for the municipal bond market in Green, Hollifield, and Schürhoff (2007b), Green, Hollifield, and Schürhoff (2007a), Harris and Piwowar (2006), the corporate bond market in…”