Bessembinder, Hendrik and Jacobsen, Stacey E. and Maxwell, William F. and Venkataraman, Kumar, Capital Commitment and Illiquidity in Corporate Bonds (March 21, 2016). Available for download at SSRN: http://ssrn.com/abstract=2752610

“We use a comprehensive sample of U.S. corporate bond trades from 2003 to 2014 that includes dealer identifiers to assess liquidity and dealers’ capital commitment. We find that customer trade execution costs have decreased over time, despite a temporary increase during the financial crisis. However, several alternative measures of market quality, including turnover, dealers’ capital commitment, the likelihood that trades are completed on a principal basis, interdealer trading, and dealers’ propensity to hold positions overnight were not only degraded during the financial crisis but failed to return to pre-crisis levels in more recent years. Difference-in-difference analyses of TRACE initiations in 2003-04 and 2014 provide no evidence that public transaction reporting contributed, which leaves regulatory initiatives implemented in the wake of the financial crisis as potential explanations for the changes in bond market liquidity. On balance, the evidence indicates that the role of corporate bond dealers has changed in recent years, as dealers are less inclined to trade on a principal basis, and more inclined to prearrange a customer trades in a search-and-match brokerage role.”