Funding Liquidity and Market Liquidity: The Broker-Dealer Perspective

Marco Macchiavelli () and Xing (Alex) Zhou ()
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Marco Macchiavelli: Federal Reserve Board, Washington, District of Columbia 20551
Xing (Alex) Zhou: Federal Reserve Board, Washington, District of Columbia 20551

Management Science, 2022, vol. 68, issue 5, 3379-3398

Abstract: We provide direct evidence of how dealers’ funding liquidity affects their liquidity provision in securities markets. Worse funding liquidity (higher repo haircuts and rates) leads to larger bid-ask spreads and transaction costs in corporate bonds. We also find that dealers’ relationships with money funds are important determinants of their repo haircuts and rates. Using dealers’ exposure to the 2016 Securities and Exchange Commission (SEC) money fund reform as an instrument, we show that funding liquidity indeed has a causal effect on market liquidity. Finally, dealers with lower funding liquidity tend to have smaller market shares and execute more trades on an agency basis.

Keywords: funding liquidity; market liquidity; triparty repo; broker-dealer; money market fund; corporate bond (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:5:p:3379-3398

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