DP12248 Market Liquidity after the Financial Crisis

Author(s): Tobias Adrian, Michael J Fleming, Or Shachar, Erik Vogt
Publication Date: August 2017
Keyword(s): corporate bonds, liquidity, market making, regulation, Treasury securities
JEL(s): G12, G21, G28
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12248

This paper examines market liquidity in the post-crisis era in light of concerns that regulatory changes might have reduced dealers' ability and willingness to make markets. We begin with a discussion of the broader trading environment, including an overview of regulations and their potential effects on dealer balance sheets and market making, but also considering additional drivers of market liquidity. We document a stagnation of dealer balance sheets after the financial crisis of 2007-09, which occurred concurrently with dealer balance sheet deleveraging. However, using high-frequency trade and quote data for U.S. Treasuries and corporate bonds, we find only limited evidence of a deterioration in market liquidity.