Presence of Potential Traders in the Corporate Bond Market

Department: Finance

Speaker: Ryan Israelsen (Michigan State U.)

Room: T020

Abstract

Corporate bond mutual funds are the most active traders in the bond market compared
to other primary bondholders like insurance companies and pension funds. In the
opaque over-the-counter market, the presence of potential traders (PPT) is crucial
to overcome search frictions. We present a direct measure of the real-time search
frictions, PPT measured by the fraction of mutual fund managers who are active on
the Bloomberg terminal, and study the time-series and cross-sectional drivers of PPT.
We find that PPT helps reduce search frictions, increase trade likelihood, and facilitate
price discovery. Moreover, PPT can help improve bond liquidity and facilitate efficient
information diffusion from the equity to the bond market. A causal relation is confirmed
using the lagged fund flow as an instrumental variable.