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Size Discount and Size Penalty Trading Costs in Bond Markets

Author

Listed:
  • Gábor Pintér

    (Bank of England)

  • Chaojun Wang

    (Wharton)

  • Junyuan Zou

    (INSEAD)

Abstract
We show that larger trades incur lower trading costs in government bond markets (“size discount”), but costs increase in trade size after controlling for clients’ identities (“size penalty”). The size discount is driven by the cross-client variation of larger traders obtaining better prices, consistent with theories of trading with imperfect competition. The size penalty, driven by the within-client variation, is larger for corporate bonds and during major macroeconomic surprises as well as during COVID-19. These differences are larger among more sophisticated clients, consistent with theories of asymmetric information. We propose a trading model with bilateral bargaining and adverse selection to rationalise the co-existence of the size penalty and discount.

Suggested Citation

  • Gábor Pintér & Chaojun Wang & Junyuan Zou, 2021. "Size Discount and Size Penalty Trading Costs in Bond Markets," Discussion Papers 2114, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2114
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    References listed on IDEAS

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    5. Barria, Rodrigo & Pinter, Gabor, 2023. "Mispricing in inflation markets," Bank of England working papers 1034, Bank of England.
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    More about this item

    Keywords

    Trading Costs; Government and Corporate Bonds; Trader Identities; Size Discount; Size Penalty;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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