The Volcker Rule and Market-Making in Times of Stress
50 Pages Posted: 11 Sep 2016 Last revised: 26 Jan 2018
Date Written: December 8, 2016
Focusing on downgrades as stress events that drive the selling of corporate bonds, we document that the illiquidity of stressed bonds has increased after the Volcker Rule. Dealers regulated by the Rule have decreased their market-making activities while non-Volcker-aﬀected dealers have not oﬀset the decreased activities of Volcker-aﬀected dealers. Furthermore, even Volcker-aﬀected dealers that are not constrained by Basel III and CCAR regulations change their behavior, inconsistent with the eﬀects being driven by these other regulations. Since Volcker-aﬀected dealers have been the main liquidity providers, bonds have become less liquid during times of stress due to the Volcker Rule.
Keywords: Volcker Rule, Corporate Bond Illiquidity, Regulation, Capital Commitment, Dealer Inventory, Market-Making, Financial Crisis
JEL Classification: G14, G21, G23, G24, G28
Suggested Citation: Suggested Citation