The Volcker Rule and corporate bond market making in times of stress

Banking Regulation and Market Making

“…The bid-ask spread can remain unchanged after regulation if there is no change in the competitiveness of the dealer sector. Empirically, the data show an increase in competition from nonregulated dealers (Bao et al 2018), which would help explain findings of decreased bid-ask spreads in certain contexts (Bao et al 2018;Trebbi and Xiao 2017).…”

“…The implication of this result is that a good way to assess the costs of regulation is by looking at price impacts, particularly when there are large imbalances of investor demand to buy or to sell. Empirical work in Dick-Nielsen 25 and Rossi (2018), Bao et al (2018) and Schultz (2017) has found increases in price impacts, particularly when immediacy is demanded.…”

“…The neutrality result on the bid-ask spread, like the ambiguity result on trading volume, calls into question the usefulness of measuring bid-ask spreads and similar metrics (such as effective spreads or the Roll metric) to assess the costs of regulation, which forms part of the analysis in Bao et al (2018), Trebbi and Xiao (2017) and Anderson and Stulz (2017).…”

“…3 Trebbi and Xiao (2017); Adrian et al (2017); Anderson and Stulz (2017);Mizrach (2015). 4 However, Bao et al (2018) find specific events cause mildly wider bid-ask spreads, which the model can match if there is a withdrawal of a dealer from the market after the event.…”

“…2 Bao et al (2018); Dick-Nielsen and Rossi (2018); Schultz (2017). 3 Trebbi and Xiao (2017); Adrian et al (2017); Anderson and Stulz (2017);Mizrach (2015).…”