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Investors as a Liquidity Backstop in Corporate Bond Markets

Author

Listed:
  • Carole Comerton-Forde
  • Billy Ford
  • Thierry Foucault

    (HEC Paris - Ecole des Hautes Etudes Commerciales)

  • Simon Jurkatis

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

  • Carole Comerton-Forde & Billy Ford & Thierry Foucault & Simon Jurkatis, 2025. "Investors as a Liquidity Backstop in Corporate Bond Markets," Working Papers hal-05187235, HAL.
    • Handle: RePEc:hal:wpaper:hal-05187235
    DOI: 10.2139/ssrn.5229934
    as

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