Alexei Orlov Coauthors Quarterly Journal of Finance Article on Corporate Bond Liquidity and Dealer Inventories

In a recent article published in the Quarterly Journal of Finance, Brattle Senior Associate Dr. Alexei Orlov and his coauthors, Plamen Ivanov of Local Pensions Partnership Investments and Michael Schihl of the US Securities and Exchange Commission, study how adding heretofore unobserved global trades to transactions that are publicly disseminated through TRACE affects the computation of bond liquidity, dealer inventories, and the relationship between the two.

Leveraging their access to the US and European regulatory data, the authors construct a sample of approximately 30,000 corporate bonds traded in both relatively transparent (US) and relatively opaque (Europe) jurisdictions. The results suggest that the liquidity premium for corporate bonds traded in multiple jurisdictions is at least 15–20% higher, depending on credit quality, than what can be inferred from TRACE alone. The authors find that this liquidity premium differential can be accounted for by dealer inventories that are based on the transactions recorded in the US and Europe.

The results have important implications for bond (mis)pricing and market efficiency. The direct and indirect evidence reported in the article contributes to several strands of literature, including fixed-income market structure and the effects of financial regulation and transparency on bond markets.

The full article, “Bond Liquidity and Dealer Inventories: Insights from the US and European Regulatory Data,” is available below.