The Volcker Rule and Market-Making in Times of Stress

Jack Bao, Maureen O'Hara and Xing Zhou

No 2016-102, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Focusing on downgrades as stress events that drive the selling of corporate bonds, we document that the illiquidity of stressed bonds has increased after the Volcker Rule. Dealers regulated by the Rule have decreased their market-making activities while non-Volcker-affected dealers have stepped in to provide some additional liquidity. Furthermore, even Volcker-affected dealers that are not constrained by Basel III and CCAR regulations change their behavior, inconsistent with the effects being driven by these other regulations. Since Volcker-affected dealers have been the main liquidity providers, the net effect is that bonds are less liquid during times of stress due to the Volcker Rule.

Keywords: Volcker Rule; Corporate Bond Illiquidity; Regulation; Capital Commitment; Dealer Inventory; Market-Making; Financial Crisis (search for similar items in EconPapers)
JEL-codes: G14 G21 G23 G24 G28 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2016-09
New Economics Papers: this item is included in nep-ban and nep-cba
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2016-102

DOI: 10.17016/FEDS.2016.102

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