Flighty Liquidity

57 Pages Posted: 23 Oct 2018 Last revised: 17 Mar 2019

See all articles by Nina Boyarchenko

Nina Boyarchenko

Federal Reserve Bank of New York

Domenico Giannone

Federal Reserve Banks - Federal Reserve Bank of New York; Centre for Economic Policy Research (CEPR)

Or Shachar

Federal Reserve Bank of New York

Date Written: October 1, 2018

Abstract

We study how the risks to future liquidity flow across corporate bond, Treasury, and stock markets. We document distribution “flight-to-safety” effects: a deterioration in the liquidity of high-yield corporate bonds forecasts an increase in the average liquidity of Treasury securities and a decrease in uncertainty about the liquidity of investment-grade corporate bonds. While the liquidity of Treasury securities both affects and is affected by the liquidity in the other two markets, corporate bond and equity market liquidity appear to be largely divorced from each other. Finally, we show that measures of market-wide volatility and market-maker constraints do not contain information useful for predicting the distribution of future liquidity over and above that contained in the recent history of bid-ask spreads.

Keywords: corporate bond liquidity, liquidity uncertainty, quantile regressions

JEL Classification: C22, G12, G17

Suggested Citation

Boyarchenko, Nina and Giannone, Domenico and Shachar, Or, Flighty Liquidity (October 1, 2018). FRB of New York Staff Report No. 870. Available at SSRN: https://ssrn.com/abstract=3271278 or http://dx.doi.org/10.2139/ssrn.3271278

Nina Boyarchenko (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-7339 (Phone)
212-720-1582 (Fax)

Domenico Giannone

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Or Shachar

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
(212) 720-6974 (Phone)
(212) 720-1582 (Fax)

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