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Regulation and Market Liquidity

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  • Francesco Trebbi

    (University of British Columbia, Vancouver, British Columbia V6T 1Z1, Canada; Canadian Institute for Advanced Research, Toronto, Ontario M5G 1M1, Canada; and National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Kairong Xiao

    (University of British Columbia, Vancouver, British Columbia V6T 1Z1, Canada; and Columbia University, New York, New York 10027)

Abstract

We examine the effects of postcrisis financial regulation, encompassing the Dodd–Frank Act and Basel III, on market liquidity of the U.S. fixed-income market. We estimate structural breaks in a large panel of liquidity measures of corporate and Treasury bonds. Our methodology does not require a priori knowledge of the timing of breaks, can capture not only sudden jumps but also breaks in slow-moving trends, and displays excellent power properties. Against the popular claim that postcrisis regulation hurt liquidity, we find no evidence of liquidity deterioration during periods of regulatory intervention. Instead, breaks toward higher liquidity are often detected. The online appendix is available at https://doi.org/10.1287/mnsc.2017.2876.

Suggested Citation

  • Francesco Trebbi & Kairong Xiao, 2019. "Regulation and Market Liquidity," Management Science, INFORMS, vol. 67(5), pages 1949-1968, May.
    • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:5:p:1949-1968
    DOI: 10.1287/mnsc.2017.2876
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Revisiting Market Liquidity: The Case of U.S. Corporate Bonds
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2017-04-17 18:34:54

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    20. Mike Anderson & René M. Stulz, 2017. "Is Post-Crisis Bond Liquidity Lower?," NBER Working Papers 23317, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    regulation; market liquidity; fixed-income market;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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