The Microstructure of European Bond Markets Organization, Price Formation, and Cost of Liquidity

The volumes outstanding in bond markets are by far larger than in equity markets. Despite this fact, most of the research on the microstructure of financial market s focuses on equity markets. This is even more surprising taking into account that (i) the microstructure of a financial market has a strong influence on its ability to allocate resources efficiently, and (ii) that the results obtained from equity markets cannot be applied to bond markets. The thesis addresses open questions related to the microstructure of bond markets and presents three empirical studies. In the first paper, a unique dataset of transactions in German federal securities is analyzed to address the question whether the historical grown structure of different coexisting trading segments - exchange trading, bilateral OTC trading, and brokered OTC trading - can be economically justified. There is evidence that the different trading segments are indeed regarded as non-interchangeable by the market participants. The second part of the thesis focuses on the price formation in customer-dealer and the interdealer bond markets by applying cointegration econometrics to a dataset of high fi-equency quotes for EMU government bonds. While the customer-dealer market is still very fragmented and intransparent, trading in the interdealer market concentrates on a smaller number of more transparent electronic trading systems like EuroMTS.