In this paper, we model price dispersion effects in over-the-counter (OTC) markets to show that, in the presence of inventory risk for dealers and search costs for investors, traded prices may deviate from the expected market valuation of an asset. We interpret this devia- tion as a liquidity effect and develop a new liquidity measure quantifying the price dispersion in the context of the US corporate bond market. This market offers a unique opportunity tofstudy liquidity effects since, from October 2004 onwards, all OTC transactions in this marketfhave to be reported to a common database known as the Trade Reporting and CompliancefEngine (TRACE). Furthermore, market-wide average price quotes are available from MarkitGroup Limited, a financial information provider. Thus, it is possible, for the first time, to directly observe deviations between transaction prices and the expected market valuation of securities. We quantify and analyze our new liquidity measure for this market and find significant price dispersion effects that cannot be simply captured by bid-ask spreads. Wefshow that our new measure is indeed related to liquidity by regressing it on commonly-usedfliquidity proxies and find a strong relation between our proposed liquidity measure and bond characteristics, as well as trading activity variables. Furthermore, we evaluate the reliability of end-of-day marks that traders use to value their positions. Our evidence suggests that the price deviations from expected market valuations are significantly larger and more volatile than previously assumed. Overall, the results presented here improve our understanding of the drivers of liquidity and are important for many applications in OTC markets, in general. (authors' abstract)

We analyze whether liquidity is an important price factor in the US corporate bond market. In particular, we focus on whether liquidity effects are more pronounced in periods of financial crises, and especially, for bonds with high credit risk. We use a unique data set covering more than 20,000 bonds, between October 2004 and December 2008. We employ a wide range of liquidity measures and and that liquidity effects account for approximately 14% of the explained market-wide corporate yield spread changes. Moreover, we find that the economic impact of the liquidity measures is significantly larger in periods of crisis and for speculative grade bonds. (authors' abstract)

Submitted by Salome Lema (salome.lema@hec.edu) on 2016-11-24T07:36:33Z No. of bitstreams: 1 20161102_Salome_Lema_Thesis - vf.pdf: 1739716 bytes, checksum: 9e2585c7ecc0b8105afd91779c254775 (MD5) / Approved for entry into archive by Josineide da Silva Santos Locatelli (josineide.locatelli@fgv.br) on 2016-11-24T10:16:30Z (GMT) No. of bitstreams: 1 20161102_Salome_Lema_Thesis - vf.pdf: 1739716 bytes, checksum: 9e2585c7ecc0b8105afd91779c254775 (MD5) / Made available in DSpace on 2016-11-24T11:16:37Z (GMT). No. of bitstreams: 1 20161102_Salome_Lema_Thesis - vf.pdf: 1739716 bytes, checksum: 9e2585c7ecc0b8105afd91779c254775 (MD5) Previous issue date: 2016-11-24 / In August 2011, the Brazilian government taxed short positions in the foreign exchange (FX) derivative market in order to weaken the surge of post-crisis capital inflow, discourage carry trade strategies on the Real and avoid further local currency appreciation. Nevertheless, nonfinancial firms are also end-users of derivatives and might have suffered in case financial institutions transfer the regulatory cost to their clients in the real economy. To the extent that this tax increases the cost of hedging, firms may decide to hedge less, causing an increase in their exposure to currency risk. This paper aims at analysing if this regulatory change had an impact on Brazilian non-financial firms FX exposure, measured by the sensitivity of stock prices to currency fluctuation (FX-Beta). Therefore, it seeks to compare the FX beta of Brazilian non-financial listed firms before and after the implementation of the measure, to assess their degree of exposure to currency risk. In accordance with an increasing cost of hedging for those companies, results show that the beta difference also reached a riskier level. / Em agosto de 2011, o governo brasileiro passou a tributar posições vendidas no mercado de derivativos cambiais para diminuir o influxo de capital estrangeiro no pós-crise, desencorajar operações de carry trade e evitar que o real continuasse a se valorizar frente ao dólar. No entanto, empresas não financeiras também são usuárias de derivativos, e podem ter tido seus custos de proteção cambial aumentados, caso as instituições financeiras tenham transferido esse custo adicional para seus clientes na economia real. Na medida em que o tributo aumenta o custo de fazer proteção cambial com derivativos, as empresas podem ter decidido proteger uma parcela menor de sua exposição, causando um aumento em sua exposição cambial. Essa dissertação analisa se essa mudança regulatória teve um impacto na exposição cambial das empresas não financeiras, medida pela sensibilidade do preço das ações às variações cambiais (FX-Beta). Assim, o estudo compara os FX-Betas das empresas brasileiras antes e depois da implementação do tributo, para medir o grau de mudança em suas exposições cambiais. Em linha com o aumento no custo do hedge para essas empresas, os resultados mostram alguma evidência de que algumas empresas se tornaram mais expostas ao câmbio.