Abstract - The same bond at different prices: identifying search frictions and selling pressures

I propose a new measure that identifies when the market price of an over-thecounter traded asset is below its fundamental value due to selling pressure. The measure is the difference between prices paid by small traders and those paid by
large traders. In a model for over-the-counter trading with search frictions and periods with selling pressures, I show that this measure identifies liquidity crises (i.e. high number of forced sellers). Using a structural estimation, the model is able to identify liquidity crises in the U.S. corporate bond market based on the relative prices of small and large traders. New light is shed on two crises, the downgrade of GM and Ford in 2005 and the subprime crisis.

Peter Feldhütter
London Business School
15.Feb 2011

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