Did Liquidity Providers Become Liquidity Seekers?

The Great Escape? A Quantitative Evaluation of the Fed’s Liquidity Facilities

“…Similarly, Longstaff et al (2005) find that the non-default component of corporate spreads (essentially, the CDS-Bond basis) is strongly related to measures of bond-specific illiquidity as well as to macroeconomic measures of bond market liquidity. We do not know the exact maturity of the underlying contracts in each index, but we suspect it is approximately five-year (Choi and Shachar, 2013). 4) The spread between the most recently issued and older 10-year Treasury bonds of the same maturity, called the on-the-run/off-the-run or the bond/old-bond spread, which is a commonly used measure of market liquidity (Krishnamurthy, 2002).…”

“…Bai and Collin-Dufresne (2013) find that measures of funding liquidity (i.e., the Libor-OIS, and the repo-Tbill spreads; see Garleanu and Pedersen (2011) Basis', and 'High Grade BBB CDS-Bond Basis'). We do not know the exact maturity of the underlying contracts in each index, however five-year maturity CDS contracts are the most prevalent (Choi and Shachar (2013)). We collect daily data from 9/5/2006 to 9/8/2014.…”

The Value of Trading Relationships in Turbulent Times

“…We test Hypothesis III by addressing the following question: Were the dealers able to absorb the selling pressure of other market participants? We can employ transaction data to compute dealers' inventory around the collapse of Dealer D. 23 One problem with calculating inventories from trade data is that we do not observe the primary market, so our measure necessarily excludes newly issued bonds. To avoid bias in our computation, we use a very narrow time window around the failure and exclude both new issues and those maturing within that time.…”

“…For the most part the literature on the role of the network is theoretical, but there are exceptions, such as Li and Schürho¤ (2014), Holli…eld et al (2012), Choi and Shachar (2013), Afonso et al (2013) and Hendershott et al (2016). 9 Li and Schürho¤ (2014) show that the municipal bond market has a persistent core-periphery structure, with a trade-o¤ between execution costs (lower in the periphery) and speed (faster in the core).…”

“…A similar network structure is uncovered by Holli…eld et al (2012) in the securitization market. Choi and Shachar (2013) inquire into the misalignment between corporate bond and CDS spreads during the …nancial crisis. Afonso et al (2013), study the overnight interbank market, …nding that borrowers that have more concentrated lenders may pay higher rates and that banks get lower interest rates from their most important lenders.…”