Corporate Bond Liquidity During the COVID-19 Crisis

56 Pages Posted: 12 Sep 2020

See all articles by Mahyar Kargar

Mahyar Kargar

University of Illinois 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 - School of Economics & Management

Pierre-Olivier Weill

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

Diego Zúñiga

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2020

Abstract

We study liquidity conditions in the corporate bond market during the COVID-19 pandemic, and the effects of the unprecedented interventions by the Federal Reserve. We find that, at the height of the crisis, liquidity conditions deteriorated substantially, as dealers appeared unwilling to absorb corporate debt onto their balance sheets. In particular, we document that the cost of risky-principal trades increased by a factor of five, forcing traders to shift to slower, agency trades. The announcements of the Federal Reserve's interventions coincided with substantial improvements in trading conditions: dealers began to "lean against the wind" and bid-ask spreads declined. To study the causal impact of the interventions on market liquidity, we exploit eligibility requirements for bonds to be purchased through the Fed's corporate credit facilities. We find that, immediately after the facilities were announced, trading costs for eligible bonds improved significantly while those for ineligible bonds did not. Later, when the facilities were expanded, liquidity conditions improved for a wide range of bonds. We develop a simple theoretical framework to interpret our findings, and to estimate how the COVID-19 shock and subsequent interventions affected consumer surplus and dealer profits.

Keywords: corporate bonds, COVID-19, intermediation, liquidity, SMCCF

JEL Classification: G12, G14, G21

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 (August 1, 2020). CEPR Discussion Paper No. DP15231, Available at SSRN: https://ssrn.com/abstract=3688185

Mahyar Kargar (Contact Author)

University of Illinois 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 - School of Economics & Management ( email )

Beijing, 100084
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

affiliation not provided to SSRN

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