We develop a model of a dealer-intermediated over-the-counter market designed to study three major changes in the structure of the U.S. corporate bond market: the increase in dealers’ balance sheet costs, the emergence of electronic trading platforms, and the growing presence of bond mutual funds and ETFs. Our model provides a unified analysis of these changes, clarifies the economic channels at play, and allows us to quantify their effects on a variety of market outcomes. Our quantitative analysis suggests that, while electronic trading significantly reduced the cost of raising capital in the corporate bond market, these gains were almost completely offset by the combined effects of balance sheet costs and changes in the demand for liquidity. We find that electronic trading also caused a meaningful decline in the bid-ask spread, whereas other changes in the market structure had little effect on transaction costs.

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