Price dynamics in OTC Bond Market: the role of market microstructure

Abstract

This thesis investigates the drivers of daily price returns in over-the-counter corporate bond markets by comparing market microstructure elements with factors like liquidity, market conditions, and bond-specific characteristics. Using a dynamic Instrumental Variable Two Stage Least Squares (IV-2SLS) model, the study identifies changes in the 10-year Treasury yield and yield spreads as primary determinants of bond returns. Additionally, market microstructure factors significantly influence returns as secondary mechanisms refining pricing based on market conditions, liquidity, and bond characteristics. These findings underscore the dominant role of macroeconomic indicators and the context-dependent role of microstructure factors, providing insights to enhance market efficiency and stability.