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

107 Pages Posted: 2 Jun 2020 Last revised: 24 May 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 propose a supply-based explanation for the increase in the liquidity premium in the corporate bond market after the global 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 and the publicly available TRACE data, I estimate the unobserved trading delays implied by the size of the liquidity premium. Based on my estimates, 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
967
Abstract Views
4,023
Rank
45,328
PlumX Metrics