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Investors as a Liquidity Backstop in Corporate Bond Markets

Author

Listed:
  • Comerton-Forde, Carole

    (University of Melbourne - Department of Finance; Centre for Economic Policy Research (CEPR))

  • Ford, Billy

    (Independent)

  • Foucault, Thierry

    (HEC Paris)

  • Jurkatis, Simon

    (Bank of England)

Abstract

Investors act as a liquidity back-stop in the corporate bond market. By providing liquidity, investors help ease dealers' balance sheet constraints, especially during market stress. During the March 2020 Dash-for-Cash, in bonds where investors stopped providing liquidity, transaction costs rose by 38%. We find the composition of types of liquidity providers - rather than just their presence - shapes trading costs. Dealers relying on flexible-mandate investors, such as hedge funds, are more resilient to liquidity shocks. Dealers offer discounts to investors for past liquidity services to maintain liquidity provider networks. These discounts represent two-thirds of relationship discounts.

Suggested Citation

  • Comerton-Forde, Carole & Ford, Billy & Foucault, Thierry & Jurkatis, Simon, 2025. "Investors as a Liquidity Backstop in Corporate Bond Markets," HEC Research Papers Series 1564, HEC Paris.
    • Handle: RePEc:ebg:heccah:1564
    DOI: 10.2139/ssrn.5229934
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    Keywords

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    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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