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Forthcoming: Journal of Economics and Business

By Anthony Saunders


We would like to thank Linda Allen for her comments. Despite its importance the market-micro structure of the secondary market for corporate bonds remains something of a mystery. The major reason for this has been the OTC interdealer nature of this market. As far as we are aware this paper presents the first exploratory field study of the U.S. inter-dealer OTC corporate bond market. We construct a primary data-base from the trades of a major bond dealer and document the competitive structure of the market in terms of the number of active dealers and market trading mechanism. We find that the trading mechanism closely resembles a first–price sealed bid auction. We also examine the potential differences between segments of the market and develop a measure of competition based on the theory of auctions. Our measure indicates that competition is highest in US investment grade corporate bonds and lowest in junk bonds. We also examine the effect of the size of a trade on pricing and spreads. 2 1

Year: 1999
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