Andreas C. Rapp – Research

Working Papers

Middlemen Matter: Corporate Bond Market Liquidity and Dealer Inventory Funding

(Job Market Paper)

Abstract: Corporate bond dealers build up considerable inventories for which they rely on short-term funding. I provide empirical evidence that dealers' inventory financing constraints are a crucial determinant of the costs of their liquidity provision in corporate bond markets. Constructing a unique dataset that links dealer identities with transaction prices, I show that dealer-specific financing constraints (as proxied by their CDS spreads) explain a substantial part of the variation in the inventory cost component of the effective bid-ask spread. Compared to low volatility bonds, the liquidity provision of high volatility bonds is more sensitive to inventory costs, especially during periods of funding stress. Finally, exploiting a quasi-natural experiment, I show that the relaxation of funding constraints through a Federal Reserve emergency credit facility temporarily alleviates liquidity problems among eligible dealers.

Paper [Online Appendix]

Presentations (includes scheduled): European Finance Association Doctoral Tutorial (Mannheim University)SAFE Market Microstructure Conference (Goethe University Frankfurt)Dauphine Microstructure Workshop (Université Paris-Dauphine) – Conference on "The Econometrics of Financial Markets" (Stockholm Business School) – Brown Bag Seminar at the Institut für Wirtschaftsforschung Halle (IWH)Universiteit van Amsterdam (UvA) Brown Bag Seminar – Tilburg University Brown Bag Seminar

Downgrades, Dealer Funding Constraints, and Bond Price Pressure

Abstract: Regulatory constraints imposed on insurance companies can induce a collective need to divest downgraded bond issues. Upon a downgrade, corporate bond dealers act as middlemen and provide liquidity by absorbing temporary order-flow imbalances. Limited access to inventory financing can temporarily limit dealers’ inventory and risk-bearing capacities though and, at least in the short run, impair liquidity provision. Using insurance company transaction data, I investigate if dealer funding constraints (as proxied by their CDS spreads) amplify price declines and stall subsequent reversals of downgraded bonds. I find that higher dealer CDS spreads are associated with substantially larger and abrupt declines and slower reversals of abnormal returns around a downgrade.


Presentations (includes scheduled): Tilburg University Brown Bag Seminar

Work in Progress

Lifting Shadows: Incomplete Post-Trade Transparency and OTC Trading

Abstract: The Financial Industry Regulatory Authority (FINRA) recurrently addresses whether it should maintain or modify dissemination caps in U.S. corporate bond markets. A widely held view is that the public disclosure of dealers' bond trades after the fact complicates subsequent trading decisions and may lead to reduced liquidity provision in the first place. This paper analyzes the implications of increased post-trade transparency on market quality in a market where both information asymmetry and inventory risk are significant. The market structure accommodates customer-dealer trading in the first and subsequent inter-dealer trading between a core and periphery dealers in the second period.

Presentations (includes scheduled): Tilburg University Brown Bag Seminar