Corporate Bond Liquidity During the Covid-19 Crisis

81 Pages Posted: 15 Jun 2020 Last revised: 19 Nov 2021

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

Tsinghua University - Tsinghua University School of Economics and Management

Pierre-Olivier Weill

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

Diego Zúñiga

University of California, Los Angeles (UCLA)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2020

Abstract

We study liquidity conditions in the corporate bond market during the COVID-19 pandemic. We document that the cost of trading immediately via risky-principal trades increased dramatically at the height of the sell-off, forcing customers to shift towards slower, agency trades. Exploiting eligibility requirements, we show that the Federal Reserve’s corporate credit facilities had a positive effect on market liquidity. A structural estimation reveals that customers’ willingness to pay for immediacy increased by about 200 bps per dollar of transaction, but quickly subsided after the Fed announced its interventions. Dealers’ marginal cost also increased substantially, but did not fully subside.

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

Tsinghua University - Tsinghua University School of Economics and Management ( email )

Beijing
China

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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