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Market Liquidity after the Financial Crisis

Author

Listed:
  • Adrian, Tobias
  • Fleming, Michael J
  • Shachar, Or
  • Vogt, Erik

Abstract

This paper examines market liquidity in the post-crisis 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 2007-09, which occurred concurrently with dealer balance sheet deleveraging. However, using high-frequency trade and quote data for U.S. Treasuries and corporate bonds, we find only limited evidence of a deterioration in market liquidity.

Suggested Citation

  • Adrian, Tobias & Fleming, Michael J & Shachar, Or & Vogt, Erik, 2017. "Market Liquidity after the Financial Crisis," CEPR Discussion Papers 12248, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12248
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    References listed on IDEAS

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    1. 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.
    2. Stefan Nagel, 2012. "Evaporating Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 25(7), pages 2005-2039.
    3. Boni, Leslie & Leach, Chris, 2004. "Expandable limit order markets," Journal of Financial Markets, Elsevier, vol. 7(2), pages 145-185, February.
    4. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    5. Menkveld, Albert J., 2013. "High frequency trading and the new market makers," Journal of Financial Markets, Elsevier, vol. 16(4), pages 712-740.
    6. 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.
    7. 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.
    8. 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.
    9. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 418-437, July.
    10. 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.
    11. 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.
    12. 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.
    13. Hasbrouck, Joel & Saar, Gideon, 2013. "Low-latency trading," Journal of Financial Markets, Elsevier, vol. 16(4), pages 646-679.
    14. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    15. 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.
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    Citations

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    Cited by:

    1. 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.
    2. repec:bin:bpeajo:v:48:y:2017:i:2017-01:p:235-316 is not listed on IDEAS
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. Mike Anderson & René M. Stulz, 2017. "Is Post-Crisis Bond Liquidity Lower?," NBER Working Papers 23317, National Bureau of Economic Research, Inc.
    9. 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.
    10. 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).
    11. 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.
    12. repec:ofr:report:17-2 is not listed on IDEAS
    13. 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.
    14. repec:bis:biscgf:60 is not listed on IDEAS

    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

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