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Flighty liquidity

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Abstract

We study how the risks to future liquidity flow across corporate bond, Treasury, and stock markets. We document distribution ?flight-to-safety? effects: a deterioration in the liquidity of high-yield corporate bonds forecasts an increase in the average liquidity of Treasury securities and a decrease in uncertainty about the liquidity of investment-grade corporate bonds. While the liquidity of Treasury securities both affects and is affected by the liquidity in the other two markets, corporate bond and equity market liquidity appear to be largely divorced from each other. Finally, we show that measures of market-wide volatility and market-maker constraints do not contain information useful for predicting the distribution of future liquidity over and above that contained in the recent history of bid-ask spreads.

Suggested Citation

  • Nina Boyarchenko & Domenico Giannone & Or Shachar, 2018. "Flighty liquidity," Staff Reports 870, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:870
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    More about this item

    Keywords

    corporate bond liquidity; quantile regressions; liquidity uncertainty;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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