Dealer Balance Sheets and Bond Liquidity Provision
46 Pages Posted: 30 Dec 2016 Last revised: 6 Sep 2017
Date Written: 2016-12-01
Do regulations decrease dealer ability to intermediate trades? Using a unique data set of dealer-bond-level transactions, we link changes in liquidity of individual U.S. corporate bonds to dealers’ transaction activity and balance sheet constraints. We show that, prior to the financial crisis, bonds traded by more levered institutions and institutions with investment-bank-like characteristics were more liquid but this relationship reverses after the financial crisis. In addition, institutions that face more regulations after the crisis both reduce their overall volume of trade and have less ability to intermediate customer trades..
Keywords: bond liquidity, regulation, dealer constraints
JEL Classification: G12, G18, G21
Suggested Citation: Suggested Citation