Liquidity Provision in a One-Sided Market: The Role of Dealer-Hedge Fund Relations

42 Pages Posted: 20 Dec 2023 Last revised: 25 Mar 2024

See all articles by Mathias S. Kruttli

Mathias S. Kruttli

Kelley Business School - Indiana University

Marco Macchiavelli

Isenberg School of Management

Phillip Monin

Board of Governors of the Federal Reserve System

Xing (Alex) Zhou

Southern Methodist University (SMU) - Finance Department

Date Written: June 26, 2024

Abstract

We show that dealers' prime brokerage relations with certain hedge funds help improve their liquidity provision in a one-sided market. During the March 2020 liquidity crisis, hedge funds increased their corporate bond positions when the bond market faced excessive selling pressures. Dealers connected with hedge funds that are natural buyers of corporate bonds charged lower transaction costs on heavily sold bonds. Dealers' leverage and funding constraints do not explain our results, nor do connections with hedge funds that are natural buyers of other asset classes. Our findings reveal that dealers' willingness to provide liquidity in a one-sided market depends on their connections with natural buyers of corporate bonds.

Keywords: JEL classification: G12, G23, G24 broker-dealers, hedge funds, corporate bonds, market liquidity

JEL Classification: G12, G23, G24.

Suggested Citation

Kruttli, Mathias S. and Macchiavelli, Marco and Monin, Phillip and Zhou, Xing (Alex), Liquidity Provision in a One-Sided Market: The Role of Dealer-Hedge Fund Relations (June 26, 2024). SMU Cox School of Business Research Paper No. 23-24, Available at SSRN: https://ssrn.com/abstract=4662272 or http://dx.doi.org/10.2139/ssrn.4662272

Mathias S. Kruttli

Kelley Business School - Indiana University ( email )

Bloomington, IN 47405
United States

Marco Macchiavelli (Contact Author)

Isenberg School of Management ( email )

Amherst, MA 01003
United States

Phillip Monin

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Xing (Alex) Zhou

Southern Methodist University (SMU) - Finance Department ( email )

United States

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