Notes on Bonds: Illiquidity Feedback During the Financial Crisis

Loading...
Thumbnail Image
Penn collection
Finance Papers
Degree type
Discipline
Subject
Finance and Financial Management
Funder
Grant number
License
Copyright date
Distributor
Related resources
Author
Musto, David K
Nini, Greg
Schwarz, Krista
Contributor
Abstract

This paper traces the evolution of extreme illiquidity discounts among Treasury securities during the financial crisis; bonds fell more than six percent below more-liquid but otherwise identical notes. Using high-resolution data on market quality and trader identities and characteristics, we find that the discounts amplify through feedback loops, where cheaper, less-liquid securities flow to investors with longer horizons, thereby increasing their illiquidity and thus their appeal to these investors. The effect of the widened liquidity gap on transactions costs is further amplified by a surge in the price liquidity providers charged for access to their balance sheets in the crisis.

Advisor
Date Range for Data Collection (Start Date)
Date Range for Data Collection (End Date)
Digital Object Identifier
Series name and number
Publication date
2016-09-28
Volume number
Issue number
Publisher
Publisher DOI
Journal Issue
Comments
Recommended citation
Collection