Over-the-Counter Market Liquidity and Securities Lending
61 Pages Posted: 5 Mar 2019
Date Written: 2019-02-19
This paper studies how over-the-counter market liquidity is affected by securities lending. We combine micro-data on corporate bond market trades with securities lending transactions and individual corporate bond holdings by U.S. insurance companies. Applying a difference-in-differences empirical strategy, we show that the shutdown of AIG's securities lending program in 2008 caused a statistically and economically significant reduction in the market liquidity of corporate bonds predominantly held by AIG. We also show that an important mechanism behind the decrease in corporate bond liquidity was a shift towards relatively small trades among a greater number of dealers in the interdealer market.
Keywords: Broker-dealers, Corporate bonds, Insurance companies, Market liquidity, Over-the-counter markets, Securities lending
JEL Classification: G01, G12, G23, G22
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