Working Paper: NBER ID: w23317
Authors: Mike Anderson; Ren M. Stulz
Abstract: Price-based liquidity metrics are better in 2013-2014 for small trades and large high-yield bond trades, but not for large investment grade bond trades, relative to before the crisis, and are better for all bond types and trade sizes relative to 2010-2012. This evidence contrasts with the widely-held view among practitioners that liquidity has worsened. However, turnover falls sharply after the crisis compared to before the crisis, which is consistent with investors having more difficulty completing trades on acceptable terms and supports the practitioner view. A frequent concern is that post-crisis liquidity could be low when markets are stressed. We consider three stress events: extreme VIX increases, extreme bond yield increases, and downgrades to high yield. We find evidence that liquidity is lower after the crisis for extreme VIX increases. However, we find no evidence that liquidity is worse for idiosyncratic stress events after the crisis than before the crisis. Our results emphasize the importance of considering how liquidity reacts to shocks which can affect financial stability and of taking into account the information from non-price liquidity metrics.
Keywords: bond liquidity; regulatory changes; market-making services
JEL Codes: G12; G18; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Price-based liquidity metrics improved (G19) | turnover worsened (J63) |
| Extreme VIX increases (C58) | liquidity is lower after the crisis (F65) |
| Downgrades associated with forced sales (G32) | price impact does not increase after the crisis (G01) |
| Regulatory changes (G18) | liquidity metrics improved for high-yield bonds post-crisis (G33) |
| Liquidity metrics for forced sales around downgrades (G33) | no significant difference after the crisis (H12) |