IDEAS home Printed from https://ideas.repec.org/a/anr/refeco/v9y2017p43-83.html
   My bibliography  Save this article

Market Liquidity After the Financial Crisis

Author

Listed:
  • Erik Vogt

    () (Citadel LLC, Chicago, Illinois 60603)

  • Michael Fleming

    () (Federal Reserve Bank of New York, New York, NY 10045)

  • Or Shachar

    () (Federal Reserve Bank of New York, New York, NY 10045)

  • Tobias Adrian

    () (International Monetary Fund, Washington, DC 20431)

Abstract

This article examines market liquidity in the postcrisis era in light of concerns that regulatory changes might have reduced dealers’ ability and willingness to make markets. We begin with a discussion of the broader trading environment, including an overview of regulations and their potential effects on dealer balance sheets and market making, but also considering additional drivers of market liquidity. We document a stagnation of dealer balance sheets after the financial crisis of 2007–2009, which occurred concurrently with dealer balance sheet deleveraging. However, using high-frequency trade and quote data for US Treasuries and corporate bonds, we find only limited evidence of a deterioration in market liquidity.

Suggested Citation

  • Erik Vogt & Michael Fleming & Or Shachar & Tobias Adrian, 2017. "Market Liquidity After the Financial Crisis," Annual Review of Financial Economics, Annual Reviews, vol. 9(1), pages 43-83, November.
    • Handle: RePEc:anr:refeco:v:9:y:2017:p:43-83
    as

    Download full text from publisher

    File URL: https://doi.org/10.1146/annurev-financial-110716-032325
    Download Restriction: Full text downloads are only available to subscribers. Visit the abstract page for more information.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 418-437, July.
    2. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    3. Stefan Nagel, 2012. "Evaporating Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 25(7), pages 2005-2039.
    4. Boni, Leslie & Leach, Chris, 2004. "Expandable limit order markets," Journal of Financial Markets, Elsevier, vol. 7(2), pages 145-185, February.
    5. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    6. Terrence Hendershott & Charles M. Jones & Albert J. Menkveld, 2011. "Does Algorithmic Trading Improve Liquidity?," Journal of Finance, American Finance Association, vol. 66(1), pages 1-33, February.
    7. Dick-Nielsen, Jens & Feldhütter, Peter & Lando, David, 2012. "Corporate bond liquidity before and after the onset of the subprime crisis," Journal of Financial Economics, Elsevier, vol. 103(3), pages 471-492.
    8. Hasbrouck, Joel & Saar, Gideon, 2013. "Low-latency trading," Journal of Financial Markets, Elsevier, vol. 16(4), pages 646-679.
    9. Adrian, Tobias & Crump, Richard K. & Moench, Emanuel, 2013. "Pricing the term structure with linear regressions," Journal of Financial Economics, Elsevier, vol. 110(1), pages 110-138.
    10. Menkveld, Albert J., 2013. "High frequency trading and the new market makers," Journal of Financial Markets, Elsevier, vol. 16(4), pages 712-740.
    11. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    12. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    13. Adrian, Tobias & Boyarchenko, Nina & Shachar, Or, 2017. "Dealer balance sheets and bond liquidity provision," Journal of Monetary Economics, Elsevier, vol. 89(C), pages 92-109.
    14. Grace Xing Hu & Jun Pan & Jiang Wang, 2013. "Noise as Information for Illiquidity," Journal of Finance, American Finance Association, vol. 68(6), pages 2341-2382, December.
    15. Eric Budish & Peter Cramton & John Shim, 2015. "Editor's Choice The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response," The Quarterly Journal of Economics, Oxford University Press, vol. 130(4), pages 1547-1621.
    16. Amy K. Edwards & Lawrence E. Harris & Michael S. Piwowar, 2007. "Corporate Bond Market Transaction Costs and Transparency," Journal of Finance, American Finance Association, vol. 62(3), pages 1421-1451, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gündüz, Yalin & Ottonello, Giorgio & Pelizzon, Loriana & Schneider, Michael & Subrahmanyam, Marti G., 2018. "Lighting up the dark: Liquidity in the German corporate bond market," SAFE Working Paper Series 230, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    2. Michele Manna & Stefano Nobili, 2018. "Banks' holdings of and trading in government bonds," Temi di discussione (Economic working papers) 1166, Bank of Italy, Economic Research and International Relations Area.
    3. Joe McLaughlin & Nathan Palmer & Adam Minson & Eric Parolin, 2018. "The OFR Financial System Vulnerabilities Monitor," Working Papers 18-01, Office of Financial Research, US Department of the Treasury.
    4. repec:ofr:report:17-2 is not listed on IDEAS
    5. Jeffrey Gao & Jianjian Jin & Jacob Thompson, 2018. "The Impact of Government Debt Supply on Bond Market Liquidity: An Empirical Analysis of the Canadian Market," Staff Working Papers 18-35, Bank of Canada.
    6. Mike Anderson & René M. Stulz, 2017. "Is Post-Crisis Bond Liquidity Lower?," NBER Working Papers 23317, National Bureau of Economic Research, Inc.
    7. Nathan Foley-Fisher & Stefan Gissler & Stephane Verani, 2018. "Over-the-counter market liquidity and securities lending," 2018 Meeting Papers 786, Society for Economic Dynamics.
    8. Adrian, Tobias & Fleming, Michael J. & Vogt, Erik, 2017. "An index of Treasury Market liquidity: 1991-2017," Staff Reports 827, Federal Reserve Bank of New York.
    9. repec:bis:biscgf:60 is not listed on IDEAS
    10. Fullwood, Jonathan & Massacci, Daniele, 2018. "Liquidity resilience in the UK gilt futures market: evidence from the order book," Bank of England working papers 744, Bank of England.
    11. Marco Del Negro & Domenico Giannone & Marc P. Giannoni & Andrea Tambalotti, 2017. "Safety, Liquidity, and the Natural Rate of Interest," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 235-316.
    12. Adrian, Tobias & Boyarchenko, Nina & Shachar, Or, 2017. "Dealer balance sheets and bond liquidity provision," Journal of Monetary Economics, Elsevier, vol. 89(C), pages 92-109.
    13. repec:fip:fednep:00050 is not listed on IDEAS
    14. Jaewon Choi & Yesol Huh, 2017. "Customer Liquidity Provision : Implications for Corporate Bond Transaction Costs," Finance and Economics Discussion Series 2017-116, Board of Governors of the Federal Reserve System (US).
    15. Adrian, Tobias & Capponi, Agostino & Vogt, Erik & Zhang, Hongzhong, 2016. "Intraday market making with overnight inventory costs," Staff Reports 799, Federal Reserve Bank of New York.
    16. Aikman, David & Bridges, Jonathan & Kashyap, Anil & Siergert, Caspar, 2018. "Would macroprudential regulation have prevented the last crisis?," Bank of England working papers 747, Bank of England.
    17. Hartmann, Philipp, 2017. "International liquidity," CEPR Discussion Papers 12337, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    corporate bonds; liquidity; market making; regulation; Treasury securities;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:anr:refeco:v:9:y:2017:p:43-83. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (http://www.annualreviews.org). General contact details of provider: http://www.annualreviews.org .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.