Post-Crisis Regulations, Trading Delays, and Increasing Corporate Bond Liquidity Premium

106 Pages Posted: 2 Jun 2020 Last revised: 27 Mar 2024

See all articles by Botao Wu

Botao Wu

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Date Written: April 1, 2020

Abstract

I examine corporate bond market liquidity from 2004 to 2019 through the lens of the liquidity premium. I document that while commonly-used transaction cost measures such as the bid-ask spread remain flat, the corporate bond liquidity premium has actually increased since the financial crisis. I argue that as post-crisis regulations such as Basel II.5 have reduced dealer’s provision of immediacy, investors now experience much longer trading delays, and so require a higher liquidity premium than before the crisis. Using a structural over-the-counter model, I estimate the unobserved trading delays implied by the size of the liquidity premium. I show bonds that used to be sold within one day now take weeks to trade.

Keywords: Corporate Bond, Liquidity Premium, Trading Delays, Basel II.5

JEL Classification: G10, G12, G18, G20

Suggested Citation

Wu, Botao, Post-Crisis Regulations, Trading Delays, and Increasing Corporate Bond Liquidity Premium (April 1, 2020). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3613379 or http://dx.doi.org/10.2139/ssrn.3613379

Botao Wu (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
960
Abstract Views
4,007
Rank
45,805
PlumX Metrics