Regulation and Market Liquidity

Francesco Trebbi, Kairong Xiao

NBER Working Paper No. 21739
Issued in November 2015
NBER Program(s):Asset Pricing, Political Economy

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.

download in pdf format
   (4785 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w21739

Users who downloaded this paper also downloaded* these:
Anderson and Stulz w23317 Is Post-Crisis Bond Liquidity Lower?
Vayanos and Wang w18251 Market Liquidity -- Theory and Empirical Evidence
Miranda-Agrippino and Rey w21722 US Monetary Policy and the Global Financial Cycle
Amir Ahmadi and Uhlig w21738 Sign Restrictions in Bayesian FaVARs with an Application to Monetary Policy Shocks
Koijen and Yogo w21749 An Equilibrium Model of Institutional Demand and Asset Prices
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us