Over-the-Counter Market Liquidity and Securities Lending

61 Pages Posted: 5 Mar 2019

See all articles by Nathan Foley-Fisher

Nathan Foley-Fisher

Board of Governors of the Federal Reserve System

Stefan Gissler

Board of Governors of the Federal Reserve System

Stephane Verani

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: 2019-02-19

Abstract

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

Suggested Citation

Foley-Fisher, Nathan and Gissler, Stefan and Verani, Stephane, Over-the-Counter Market Liquidity and Securities Lending (2019-02-19). FEDS Working Paper No. 2019-011. Available at SSRN: https://ssrn.com/abstract=3339316 or http://dx.doi.org/10.17016/FEDS.2019.011

Nathan Foley-Fisher (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Stefan Gissler

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Stephane Verani

Board of Governors of the Federal Reserve System ( email )

20th & C. St., N.W.
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/econresdata/stephane-verani.htm

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