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Does market design contribute to market stability? Indications from a corporate bond exchange during the COVID-19 crisis

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  • Abudy, Menachem (Meni)
  • Shust, Efrat

Abstract

The common practice worldwide is to trade corporate bonds over the counter (OTC). Conversely, in Israel bonds are traded on an exchange like stocks. We document that during the COVID-19 crisis, trading activity in the Israeli corporate bond market rose sharply despite a significant decrease in liquidity. It occurred without the need for any regulatory intervention. Our findings differ from the evidence on major OTC bond markets, where a liquidity crisis prompt central banks to intervene and ensure market stability. The patterns we document in the Israeli exchange-based bond market resemble to the evidence recorded in exchange-based equity markets worldwide. The findings indicate that trading mechanism may serve as a determinant of financial stability.

Suggested Citation

  • Abudy, Menachem (Meni) & Shust, Efrat, 2023. "Does market design contribute to market stability? Indications from a corporate bond exchange during the COVID-19 crisis," Journal of Economics and Business, Elsevier, vol. 123(C).
  • Handle: RePEc:eee:jebusi:v:123:y:2023:i:c:s0148619522000613
    DOI: 10.1016/j.jeconbus.2022.106105
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    Cited by:

    1. Ari Kutai & Daniel Nathan & Milena Wittwer, 2024. "Exchanges for government bonds? Evidence during COVID-19," Bank of Israel Working Papers 2024.03, Bank of Israel.

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    More about this item

    Keywords

    Bid–ask spreads; Corporate bonds; Liquidity; Trading costs; Trading volume;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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