Flighty liquidity

Nina Boyarchenko, Domenico Giannone and Or Shachar

No 870, Staff Reports from Federal Reserve Bank of New York

Abstract: We study how the risks to future liquidity flow across corporate bond, Treasury, and stock markets. We document distribution ?flight-to-safety? effects: a deterioration in the liquidity of high-yield corporate bonds forecasts an increase in the average liquidity of Treasury securities and a decrease in uncertainty about the liquidity of investment-grade corporate bonds. While the liquidity of Treasury securities both affects and is affected by the liquidity in the other two markets, corporate bond and equity market liquidity appear to be largely divorced from each other. Finally, we show that measures of market-wide volatility and market-maker constraints do not contain information useful for predicting the distribution of future liquidity over and above that contained in the recent history of bid-ask spreads.

Keywords: corporate bond liquidity; quantile regressions; liquidity uncertainty (search for similar items in EconPapers)
JEL-codes: C22 G12 G17 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2018-10-01
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