Liquidity, Transparency and Disclosure in the Securitized Product Market

Abstract:     
We analyze liquidity effects in the US fixed-income securitized product market using a unique data-set compiled by the Financial Industry Regulatory Authority (FINRA), containing all transactions between May 16, 2011 and February 29, 2012. We employ a wide range of liquidity proxies proposed in the academic literature that rely on various information sets. Our results show that the average transaction cost of a round-trip trade is around 66 bp in the securitized product market and that liquidity is quite diverse in the different market segments. In particular, we find that securities that are mainly institutionally traded, issued by a federal authority, or with low credit risk, tend to be more liquid. In addition, we discuss the relation between the measurement of liquidity and the disclosure of information, and provide evidence that transaction cost measures computed at a more aggregate level may still be reasonable proxies for liquidity. This finding is important for all market participants, but particularly for regulators, who need to decide on the level of detail of the transaction data to be disseminated to the market.

Number of Pages in PDF File: 37

Keywords: liquidity, securitized products, OTC markets, transaction costs, transparency

JEL Classification: G12, G14

working papers series