Price discovery in China's inter-bank bond market

This paper examines the contributions of individual banks to price discovery in China's inter-bank bond market. In this market, large state commercial banks, city commercial banks, and approved foreign banks act as dealers to facilitate the trading process. We propose a structural model to capture the dynamic relationships among the quotes of these dealers. Our empirical results show that while large state commercial banks have advantages over other dealers in obtaining new information, they take longer to adjust their quotes to the new equilibrium. Meanwhile, foreign banks can incorporate new information into their quotes quickly and efficiently, thus contributing more to price discovery than most Chinese banks and sometimes even large state commercial banks.