Articlehybrid2024

Size Discount and Size Penalty: Trading Costs in Bond Markets

Gábor Pintér · Chaojun Wang · Junyuan Zou

21 citations0/0 files storedReview of Financial Studies

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Financial Markets and Investment Strategies Stochastic processes and financial applications Credit Risk and Financial Regulations

Abstract

Abstract We show that larger trades incur lower trading costs in government bond markets (“size discount”), but costs increase in trade size after controlling for client identity (“size penalty”). The size discount is driven by the cross-client variation of larger traders obtaining better prices, consistent with theories of trading with imperfect competition. The size penalty, driven by the within-client variation, is larger for corporate bonds, during major macroeconomic surprises and during COVID-19. These differences are larger among more sophisticated clients, consistent with information-based theories.

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References

1985Continuous Auctions and Insider Trading 1985Bid, ask and transaction prices in a specialist market with heterogeneously informed traders 1982Perfect Equilibrium in a Bargaining Model 1987Price, trade size, and information in securities markets 1981Optimal dealer pricing under transactions and return uncertainty 2004Over-the-Counter Markets 2007Corporate Yield Spreads and Bond Liquidity 2007Corporate Bond Market Transaction Costs and Transparency

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