Transactions Costs and the Term Structure of Interest Rates in the OTC Bond Market in Japan.

This paper analyzes how the recent expansion of secondary bond trading reduced the transactions cost and discusses the imp lication of this reduced transactions cost for the term structure of interest rates in the over-the-counter (OTC) bond market in Japan. It shows that the increased trading volume and competition reduced the bid-ask price spreads of bonds and, as a result, the term structure o f interest rates in the OTC market converged to the term structure in the Euroyen market. Copyright 1987 by Ohio State University Press.