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Corporate Bond Dealers' Inventory Risk and FOMC

Author

Listed:
  • Alessio Ruzza

    (University of Lugano and Swiss Finance Institute)

  • Wojciech Zurowski

    (University of Lugano and Swiss Finance Institute)

Abstract

Macroeconomic announcements increase trading activity, with potential consequences for liquidity. This paper studies the effect of FOMC announcements on the US corporate bond market liquidity. The releases do not seem to create adverse selection. We obtain the probability distribution of monetary policy outcomes from 30 day Fed funds Futures. Despite the low toxicity of the order flow, dealers increase the price for liquidity provision in the presence of monetary policy uncertainty and unexpected Fed rate changes. Trading costs decomposition reveals that inventory risk aversion drives the dealers' behaviour. We conclude that a dealership market falls short around macroeconomic announcements, even when adverse selection may be absent.

Suggested Citation

  • Alessio Ruzza & Wojciech Zurowski, 2017. "Corporate Bond Dealers' Inventory Risk and FOMC," Swiss Finance Institute Research Paper Series 17-68, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1768
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    More about this item

    Keywords

    corporate bond market; inventory risk; FOMC; Fed funds futures;
    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

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