Dealer balance sheets and bond liquidity provision

Arbeitspapier

Do regulations decrease dealer incentives to intermediate trades? Using a unique data set of dealer-bond-level transactions, we construct the dealer-specific market liquidity metrics for the U. S. corporate bond market. Unlike prior studies, the transactions that we observe are uncapped in size and include the identity of dealer counterparties to the transaction. The granular nature of our data allows us to link changes in liquidity of individual corporate bonds to dealer transaction activity. We show that, in the full sample, bond-level liquidity is higher when institutions that are active traders in the bond are more levered, have higher trading revenue, have higher liquidity mismatch, are more vulnerable, have lower risk-weighted assets, are less reliant on repo funding, and hold fewer illiquid assets. In the rule implementation period (post January 2014), bonds traded by more vulnerable institutions and institutions with greater liquidity mismatch are less liquid, suggesting that prudential regulations may be having an effect on bond market liquidity.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Staff Report ; No. 803

Classification and Topics

• Classification: Wirtschaft ; Asset Pricing; Trading Volume; Bond Interest Rates ; General Financial Markets: Government Policy and Regulation ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• Subject: bond liquidity ; regulation ; dealer constraints

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Adrian, Tobias ; Boyarchenko, Nina ; Shachar, Or
• Event: Veröffentlichung
• (who): Federal Reserve Bank of New York
• (where): New York, NY
• (when): 2016

Further information

• Handle: http://hdl.handle.net/10419/175211
• Last update: 10.03.2025, 11:43 AM CET