NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Is Post-Crisis Bond Liquidity Lower?

Mike Anderson, René M. Stulz

NBER Working Paper No. 23317
Issued in April 2017, Revised in April 2017
NBER Program(s):The Asset Pricing Program, The Corporate Finance Program

Price-based liquidity metrics are better in 2013-2014 for small trades and large high-yield bond trades, but not for large investment grade bond trades, relative to before the crisis, and are better for all bond types and trade sizes relative to 2010-2012. This evidence contrasts with the widely-held view among practitioners that liquidity has worsened. However, turnover falls sharply after the crisis compared to before the crisis, which is consistent with investors having more difficulty completing trades on acceptable terms and supports the practitioner view. A frequent concern is that post-crisis liquidity could be low when markets are stressed. We consider three stress events: extreme VIX increases, extreme bond yield increases, and downgrades to high yield. We find evidence that liquidity is lower after the crisis for extreme VIX increases. However, we find no evidence that liquidity is worse for idiosyncratic stress events after the crisis than before the crisis. Our results emphasize the importance of considering how liquidity reacts to shocks which can affect financial stability and of taking into account the information from non-price liquidity metrics.

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Document Object Identifier (DOI): 10.3386/w23317

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