Over-the-Counter Market Liquidity and Securities Lending

55 Pages Posted: 27 Feb 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: February 19, 2019

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.

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

Foley-Fisher, Nathan and Gissler, Stefan and Verani, Stephane, Over-the-Counter Market Liquidity and Securities Lending (February 19, 2019). BIS Working Paper No. 768. Available at SSRN: https://ssrn.com/abstract=3340251

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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