Bond Losses and Systemic Risk

Klenio Barbosa, Dakshina De Silva, Liyu Yang and Hisayuki Yoshimoto

No 288072615, Working Papers from Lancaster University Management School, Economics Department

Abstract: This paper documents the existence of primary dealers' losses in Treasury bond markets and investigates how these losses affect dealers' market value. Using a novel data set that tracks more than 2,350 primary-to-secondary transactions, we find that bond losses for primary dealers are prevalent and were severe during the financial crisis. Our results indicate that liquidity constraints are a major source of bond losses observed in primary-to-secondary trades. We also find that financial sector value is correlated with these losses. Using an alternating market experiment, we show that bond losses are higher under discriminatory auctions as compared to uniform auctions.

Keywords: Bond Losses; Treasury Bonds; Liquidity Constraint; Auction Mechanisms (search for similar items in EconPapers)
JEL-codes: C57 C58 D44 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:lan:wpaper:288072615

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