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Regulation and Market Liquidity

Author

Listed:
  • Francesco Trebbi
  • Kairong Xiao

Abstract

The aftermath of the 2008-09 U.S. financial crisis has been characterized by regulatory intervention of unprecedented scale. Although the necessity of a realignment of incentives and constraints of financial markets participants became a shared posterior after the near collapse of the U.S. financial system, considerable doubts have been subsequently raised on the welfare consequences of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and its various subcomponents, such as the Volcker Rule. The possibility of permanently inhibiting the market making capacity of large banks, with dire consequences in terms of under-provision of market liquidity, has been repeatedly raised. This paper presents systematic evidence from four different estimation strategies of the absence of breakpoints in market liquidity for fixed-income asset classes and across multiple liquidity measures, with special attention given to the corporate bond market. The analysis is performed without imposing restrictions on the exact dating of breaks (i.e. allowing for anticipatory response or lagging reactions to regulation) and focusing both on levels and dynamic latent factors. We report both single breakpoint and multiple breakpoint tests and analyze the liquidity of corporate bonds matched to their main underwriters making markets on those assets. Post-crisis U.S. regulatory intervention does not appear to have produced structural deteriorations in market liquidity.

Suggested Citation

  • Francesco Trebbi & Kairong Xiao, 2015. "Regulation and Market Liquidity," NBER Working Papers 21739, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21739
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    File URL: http://www.nber.org/papers/w21739.pdf
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Revisiting Market Liquidity: The Case of U.S. Corporate Bonds
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2017-04-17 18:34:54

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    Cited by:

    1. David A. Cimon & Corey Garriott, 2017. "Banking Regulation and Market Making," Staff Working Papers 17-7, Bank of Canada.
    2. 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.
    3. Mike Anderson & René M. Stulz, 2017. "Is Post-Crisis Bond Liquidity Lower?," NBER Working Papers 23317, National Bureau of Economic Research, Inc.
    4. repec:eee:finmar:v:36:y:2017:i:c:p:115-131 is not listed on IDEAS

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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