Measuring Liquidity Provision by Customers in Corporate Bond Markets: Evidence from 54 Million Transactions

73 Pages Posted: 29 Oct 2019 Last revised: 26 Dec 2019

See all articles by Jinming Xue

Jinming Xue

University of Maryland - Department of Finance

Date Written: December 24, 2019

Abstract

This paper measures the time-varying provision of liquidity by buy-side customers (e.g., mutual funds and pension funds), relative to bond dealers, in corporate bond markets using a structural vector autoregression (SVAR) model. As indicated by my simple theory model, shocks to the relative willingness of customers and bond dealers to provide liquidity affect, in opposite directions, the choice of bond dealers between market-making (principal) and matchmaking (riskless principal) transactions. Motivated by this model, my SVAR empirically disentangles these shocks to customers versus bond dealers. My SVAR-derived patterns of these structural shocks provide fundamental insights into the mechanics in corporate bond markets following recent events, such as exposing the increased role of buy-side customers for liquidity provision after the many regulatory changes following the 2008 financial crisis. Furthermore, my empirical approach generates “factors” that provide an improved time-series asset-pricing model for yield spreads of corporate bonds of different credit ratings.

Keywords: corporate bond; customer liquidity provision; structural vector autoregression; sign restrictions

JEL Classification: G12; G14; G24

Suggested Citation

Xue, Jinming, Measuring Liquidity Provision by Customers in Corporate Bond Markets: Evidence from 54 Million Transactions (December 24, 2019). Paris December 2019 Finance Meeting EUROFIDAI. Available at SSRN: https://ssrn.com/abstract=3475441 or http://dx.doi.org/10.2139/ssrn.3475441

Jinming Xue (Contact Author)

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

HOME PAGE: http://https://sites.google.com/view/jinmingxue/home

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