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Size discount and size penalty: trading costs in bond markets

Author

Listed:
  • Pintér, Gábor

    (Bank of England)

  • Wang, Chaojun

    (The Wharton School)

  • Zou, Junyuan

    (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, during major macroeconomic surprises and during Covid‑19. These differences are larger among more sophisticated clients, consistent with information‑based theories. The size penalty in US Treasuries is about three times as small as in UK gilts.

Suggested Citation

  • Pintér, Gábor & Wang, Chaojun & Zou, Junyuan, 2022. "Size discount and size penalty: trading costs in bond markets," Bank of England working papers 970, Bank of England.
    • Handle: RePEc:boe:boeewp:0970
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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.
    6. Ivashchenko, Alexey, 2024. "Corporate bond price reversals," Journal of Financial Markets, Elsevier, vol. 68(C).

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    More about this item

    Keywords

    Trading costs; trade size; government and corporate bonds; trader identities;
    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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