Trading costs of private debt

We use institutional trade and dealer quote data to estimate transaction costs in the over-the-counter leveraged loan market. In the time series, we find an asymmetric response of trans-action costs to loan market returns: negative market returns increase costs much more than positive returns decrease them. In the cross-section, our results support the inventory holding costs and adverse selection paradigms of price formation. As expected for a market without the governance role of securities laws and any regulatory oversight, the level of informed trading is high. Finally, liquidity is marginally priced in secondary market loan spreads, as predicted by classic asset pricing theory.(c) 2021 Elsevier B.V. All rights reserved.