Capital Commitment and Illiquidity in Corporate Bonds
We study liquidity in U.S. corporate bond markets from 2003 to 2014. Despite a temporary increase during the financial crisis, trade execution costs have decreased over time. However, alternative measures, including intraday and overnight dealer capital commitment, dealer participation as principals, turnover, the frequency of block trades, and interdealer trading, have not returned to pre-crisis levels and in many cases have worsened. The reduction in dealers’ commitment to bond market making in recent years is attributable to bank-affiliated dealers, while non-bank dealers have increased their participation. The evidence supports that these outcomes reflect unintended consequences of post-crisis regulations focused on banking.
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