Over-the-Counter Market Liquidity and Securities Lending
55 Pages Posted: 27 Feb 2019
Date Written: February 19, 2019
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.
Online Appendix: Online Appendix - Further Robustness Tests
Keywords: over-the-counter markets, corporate bonds, market liquidity, securities lending, insurance companies, broker-dealers
JEL Classification: G01, G12, G22, G23
Suggested Citation: Suggested Citation