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Market liquidity after the financial crisis

Listed author(s):
  • Adrian, Tobias

    (Federal Reserve Bank of New York)

  • Fleming, Michael J.

    (Federal Reserve Bank of New York)

  • Shachar, Or

    (Federal Reserve Bank of New York)

  • Vogt, Erik

    (Federal Reserve Bank of New York)

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 dealers’ balance sheet deleveraging. However, using high-frequency trade and quote data for U.S. Treasuries and corporate bonds, we do not find clear evidence of a deterioration in market liquidity. We conclude with ideas for future research, including the evaluation of additional data, methodological improvements, and closer analyses of liquidity risk and the interplay between market liquidity and funding liquidity..

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 796.

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Length: 42 pages
Date of creation: 19 Oct 2016
Date of revision: 20 Oct 2016
Handle: RePEc:fip:fednsr:796
Note: An earlier version of this paper circulated in May 2015 under the title “Vol-of-Vol and Market Making.”
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