Working Paper: CEPR ID: DP15231
Authors: Mahyar Kargar; Benjamin Lester; David Lindsay; Shuo Liu; Pierre-Olivier Weill; Diego Zuniga
Abstract: We study liquidity conditions in the corporate bond market during the COVID-19 pandemic.We document that the cost of trading immediately via risky-principal trades increased dramaticallyat the height of the sell-off, forcing customers to shift towards slower, agency trades.Exploiting eligibility requirements, we show that the Federal Reserve’s corporate credit facilitieshad a positive effect on market liquidity. A structural estimation reveals that customers’willingness to pay for immediacy increased by about 200 bps per dollar of transaction, butquickly subsided after the Fed announced its interventions. Dealers’ marginal cost also increased substantially, but did not fully subside.
Keywords: Corporate Bonds; Liquidity; Intermediation; SMCCF; COVID-19
JEL Codes: G12; G14; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trading costs for eligible bonds (G12) | market liquidity (G10) |
| market conditions (P42) | trading behaviors (G41) |
| dealers' marginal costs (D40) | supply-side shock (E65) |
| Federal Reserve's interventions (E52) | market liquidity (G10) |
| announcement of the SMCCF (E60) | trading costs for eligible bonds (G12) |