Finance Seminar - Ben Lester (Fed Phili)

Abstract: In over-the-counter (OTC) financial markets, customers search for trades by making repeated inquiries to dealers. Yet, there is little direct empirical evidence of this sequential search process, since existing transaction data only provides information about the times customers complete their trade, but no information about the times they search for a trade. In this paper, we shed new light on customers’ sequential search process by leveraging a complete record of inquiries—successful and not—made on the leading electronic trading platform for corporate bonds. We obtain estimates of time to trade and trading costs, conditional on observable trade characteristics and the number of previously unsuccessful inquiries. We find that after the first failed inquiry, it takes two to three days for a customer to purchase an investment-grade bond. When interpreted through the lens of a sequential search model, our estimates highlight the importance of both observed and unobserved heterogeneity across customers. Overall, these estimates can serve as useful inputs into quantitative applications of search models and guide future theoretical explorations of sources of search frictions in OTC markets.

Location: B20 Jevons LT, Drayton House or Zoom.

Link to paper.

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