Three essays on international term structures and bond markets

My dissertation examines the roles of market frictions, investors' behavior, and economic fundamentals in determining fixed-income prices. It is divided into three essays. My first essay provides empirical evidence for the importance of costly search in the decentralized corporate bond market. Using corporate bond transaction data, I find that trade prices vary considerably for the same bond and on the same day. In the world of perfect information, the observed price dispersion is too large to be justified by either intraday price movements or dealer differences. The cross-sectional patterns of trading costs are also consistent with costly search models, based on the premise that investors' incentives to price-shop increase with trade size. Both mean and dispersion of trading costs decline significantly with trade size. My findings suggest that quotation transparency will lead to more competitive markets.;My second essay studies currency-driven market segmentation by examining the market price of default risk implied by the swap spreads in EUR and USD. I take the same default risk having different prices as an indication of segmentation. I model the Libor and swap rates, government bond yields, and exchange rate jointly in a reduced-form affine term-structure framework. I estimate the model by Extended Kalman Filter. I find that the international money markets are well integrated in regular periods, but segmented in periods of high default risk and market uncertainty. My findings suggest that default risk and volatility limit (imperfect) cross-currency arbitrage.;My third essay investigates why the term structures in different currencies comove by studying the transmissions of macroeconomic shocks across countries. I model the dynamics of macro variables in a vector autoregressive framework, and impose the no-arbitrage restrictions on bond yields across maturities. I find that the U.S. inflation and the U.S. monetary policy explain over 60% of the covariance of bond yields between the U.S. and the U.K. as well as between the U.S. and Germany. I also find that for the five-year yields, these factors work almost exclusively through the term premium.