The Effects of the Volcker Rule on Corporate Bond Trading: Evidence from the Underwriting Exemption

55 Pages Posted: 18 Nov 2019

See all articles by Meraj Allahrakha

Meraj Allahrakha

International Monetary Fund (IMF) - Statistics Department; George Mason University - Department of Computational Social Science; George Washington University - Department of Economics

Jill Cetina

Federal Reserve Banks - Federal Reserve Bank of Dallas

Benjamin Munyan

Vanderbilt University - Finance

Sumudu W. Watugala

Cornell University - Dyson School of Applied Economics and Management

Multiple version iconThere are 2 versions of this paper

Date Written: October 2019

Abstract

Using confidential supervisory data on dealer-identified corporate bond trading, we examine how the Volcker rule affected the provision of liquidity. By exploiting the rule’s underwriting exemption to identify the Volcker rule’s effects separate from other post-crisis changes in regulation and broader trends in market liquidity, we find significant adverse liquidity effects on covered firms’ corporate bond trading, borne by both customers and other dealers trading with the covered firm. We find no reduction in the volatility of covered firms’ trading costs due to the rule, while their market share has decreased. These effects do not appear to be transitional.

Keywords: Banking regulation, Volcker rule, heightened prudential regulation, corporate bonds, market liquidity, regulatory impact analysis

JEL Classification: G28, G21, G23

Suggested Citation

Allahrakha, Meraj and Cetina, Jill and Munyan, Benjamin K. and Watugala, Sumudu W., The Effects of the Volcker Rule on Corporate Bond Trading: Evidence from the Underwriting Exemption (October 2019). Available at SSRN: https://ssrn.com/abstract=3068476 or http://dx.doi.org/10.2139/ssrn.3068476

Meraj Allahrakha

International Monetary Fund (IMF) - Statistics Department ( email )

Washington, DC
United States

George Mason University - Department of Computational Social Science

4400 University Drive
Research I, CSC Suite, Level 3
Fairfax, VA 22030
United States

George Washington University - Department of Economics

Monroe Hall, Suite 340
2115 G Street, NW
Washington, DC 20052
United States

Jill Cetina

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Benjamin K. Munyan (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Sumudu W. Watugala

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

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