Corporate Bond Liquidity During the COVID-19 Crisis

20 Pages Posted: 15 Jun 2020 Last revised: 23 Jun 2020

See all articles by Mahyar Kargar

Mahyar Kargar

University of Illinois at Urbana-Champaign - Department of Finance

Benjamin R. Lester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Daivd Lindsay

University of California, Los Angeles (UCLA) - Department of Economics

Shuo Liu

Department of Economics

Pierre-Olivier Weill

University of California, Los Angeles; National Bureau of Economic Research (NBER)

Diego Zúñiga

University of California, Los Angeles (UCLA)

Date Written: June 2020

Abstract

We study liquidity conditions in the corporate bond market since the onset of the COVID-19 pandemic. We find that in mid-March 2020, as selling pressure surged, dealers were wary of accumulating inventory on their balance sheets, perhaps out of concern for violating regulatory requirements. As a result, the cost to investors of trading immediately with a dealer surged. A portion of transactions migrated to a slower, less costly process wherein dealers arranged for trades directly between customers without using their own balance sheet space. Interventions by the Federal Reserve appear to have relaxed balance sheet constraints: soon after they were announced, dealers began absorbing inventory, bid-ask spreads declined, and market liquidity started to improve. Interestingly, liquidity conditions improved for bonds that were eligible for the Fed’s lending/purchase programs and for bonds that were ineligible. Hence, by allowing dealers to unload certain assets from their balance sheet, the Fed’s interventions may have helped dealers to better intermediate a wide variety of assets, including those not directly targeted.

Suggested Citation

Kargar, Mahyar and Lester, Benjamin R. and Lindsay, Daivd and Liu, Shuo and Weill, Pierre-Olivier and Zúñiga, Diego, Corporate Bond Liquidity During the COVID-19 Crisis (June 2020). NBER Working Paper No. w27355, Available at SSRN: https://ssrn.com/abstract=3626856

Mahyar Kargar (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

Champaign, IL 61820
United States

HOME PAGE: http://mahyarkargar.com

Benjamin R. Lester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

HOME PAGE: http://sites.google.com/site/benjaminrlester

Daivd Lindsay

University of California, Los Angeles (UCLA) - Department of Economics ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

Shuo Liu

Department of Economics ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

Pierre-Olivier Weill

University of California, Los Angeles ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Diego Zúñiga

University of California, Los Angeles (UCLA) ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States

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