Finance and Economics Discussion Series (FEDS)

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February 2019

Over-the-Counter Market Liquidity and Securities Lending

Nathan Foley-Fisher, Stefan Gissler, and Stéphane Verani

Abstract:

This paper studies how over-the-counter market liquidity is affected by securities lending. We combine micro-data on corporate bond market trades with securities lending transactions and individual corporate bond holdings by U.S. insurance companies. Applying a difference-in-differences empirical strategy, we show that the shutdown of AIG's securities lending program in 2008 caused a statistically and economically significant reduction in the market liquidity of corporate bonds predominantly held by AIG. We also show that an important mechanism behind the decrease in corporate bond liquidity was a shift towards relatively small trades among a greater number of dealers in the interdealer market.

Accessible materials (.zip)

Keywords: broker-dealers, corporate bonds, insurance companies, market liquidity, over-the-counter markets, securities lending

DOI: https://doi.org/10.17016/FEDS.2019.011

PDF: Full Paper

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Last Update: January 09, 2020