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Corporate Bond Market Transaction Costs and Transparency





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    • Amy Edwards is a Financial Economist in the Office of Economic Analysis of the U.S. Securities and Exchange Commission. Larry Harris is the Fred V. Keenan Chair at the Marshall School of Business, University of Southern California. Mike Piwowar is a Principal at Securities Litigation and Consulting Group, Inc. Much of this research was completed while Dr. Harris was Chief Economist and Dr. Piwowar was a Financial Economist at the SEC. The paper has benefited from the comments of the editor (Rob Stambaugh), an anonymous referee, Chester Spatt, Lisa Hasday, Yolanda Goettsch, Bruno Biais, Pam Moulton, Gideon Saar, and Hank Bessembinder. We thank seminar participants at the SEC, the University of Delaware, George Washington University, Barclays Global Investors, Arizona State University, Emory University, Hofstra University, University College Dublin, Federal Reserve Board of Governors, George Mason University, and American University. We also thank conference participants at the Q Group Fall 2004 Research Seminar, the 2004 Bank of Canada Fixed Income Workshop, the 2005 Utah Winter Finance Conference, the 2005 Moody's and London Business School Credit Risk Conference, and the 2005 Western Finance Association Annual Meeting. The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee. This study expresses the authors' views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff. All errors and omissions are the sole responsibility of the authors.


Using a complete record of U.S. over-the-counter (OTC) secondary trades in corporate bonds, we estimate average transaction costs as a function of trade size for each bond that traded more than nine times between January 2003 and January 2005. We find that transaction costs decrease significantly with trade size. Highly rated bonds, recently issued bonds, and bonds close to maturity have lower transaction costs than do other bonds. Costs are lower for bonds with transparent trade prices, and they drop when the TRACE system starts to publicly disseminate their prices. The results suggest that public traders benefit significantly from price transparency.