Academic studies
Market studies
Regulators’ studies
Academic studies
Chatterjee et al., 2019, Ownership structure and the cost of debt: Evidence from the Chinese corporate bond market
Drawing upon evidence from the Chinese corporate bond market, the researchers study how ownership structure affects the cost of debt for firms. Their results show that state, institutional and foreign ownership formats reduce the cost of debt for firms. The benefits of state ownership are accentuated when the issuer is headquartered in a province with highly developed market institutions, operates in an industry less dominated by the state or during the period after the 2012 anti-corruption reforms. Institutional ownership provides the most benefits in environments with lower levels of marketization, especially for firms with low credit quality. Our evidence sheds light on the nexus of ownership and debt cost in a political economy where state and private firms face productivity and credit frictions. It is also illustrative of how the market environment interacts with corporate ownership in affecting the cost of bond issuance.

Butler, et al., 2019, Financial innovation and financial intermediation: Evidence from credit default swaps
The paper studies the influence of credit default swaps (CDS) on the intermediation of the bond issuance process. After CDS initiation, corporate bond underwriting fees are lower due to the hedging opportunities CDS provide to investors. Participation increases for bond offerings by investors facing risk-based regulatory requirements, underwriting fees decline more for riskier issuers and illiquid bonds for which the ability to hedge with CDS is more valuable, and the underwriting quality remains unchanged. The researchers’ evidence suggests that CDS-driven innovations in risk sharing contribute to the transactional efficiency of the market by reducing the financial intermediation costs of placing bonds.

Gündüz, et al., 2019, Lighting up the Dark: Liquidity in the German Corporate Bond Market
The researchers study the impact of transparency on liquidity in OTC markets. They do so by providing an analysis of liquidity in a corporate bond market without trade transparency (Germany), and comparing these findings to a market with full post-trade disclosure (the U.S.). They employ a unique regulatory dataset of transactions of German financial institutions from 2008 until 2014 to find that: First, overall trading activity is much lower in the German market than in the U.S. Second, similar to the U.S., the determinants of German corporate bond liquidity are in line with search theories of OTC markets. Third, surprisingly, frequently traded German bonds have transaction costs that are 39-61 bp lower than a matched sample of bonds in the U.S. The results support the notion that, while market liquidity is generally higher in transparent markets, a sub-set of bonds could be more liquid in more opaque markets because of investors “crowding” their demand into a small number of more actively traded securities.

Bali et al, 2018, How and Why Do Corporate Bond Returns Depend on Past Returns? An Empirical Investigation
The cross-section of corporate bond returns strongly depends on past bond returns. Comprehensive transaction-based bond data yield evidence of significant short-term and long-term reversals as well as medium-term momentum in bond returns. The papers provides an illiquidity-based explanation of short-term reversal and show that momentum and long-term reversals are prevalent in the high credit risk sector. Further, long-term reversals occur mainly in downgraded bonds (with low returns), indicating that downgrading increases the risk of holding the bonds, thus increasing the required return. Return-based factors for corporate bonds carry sizable premia and provide strong explanatory power for returns of industry/size/rating/maturity-sorted bond portfolios.

Anand et al, 2018, Do buy-side institutions supply liquidity in bond Markets? Evidence from mutual funds
The paper examines the role of buy-side institutions as liquidity suppliers in bond markets. Focusing on mutual funds, the researchers classify a fund’s trading style as liquidity supplying (demanding) if the fund helps absorb (strain) dealers’ inventory. While mutual funds in aggregate demand liquidity, persistent cross-sectional variation exists – stable funding, family affiliation with dealers, and fund manager skill are associated with liquidity supply. Liquidity supplying trading style earns higher alpha, especially in illiquid markets. The evidence suggests that bond market liquidity can be enhanced by removing institutional frictions that impede broad investor participation in liquidity provision.

Bessembinder et al., 2017, Capital Commitment and Illiquidity in Corporate Bonds
We study trading costs and dealer behavior in U.S. corporate bond markets from 2006 to 2016. Despite a temporary spike during the financial crisis, trade execution costs have not increased notably over time. However, alternative measures, including dealer capital commitment over various time horizons, turnover, block trade frequency, and average trade size not only decreased during the financial crisis, but continued to decline afterward. These declines are attributable to bank-affiliated dealers, as non-bank dealers have increased their market commitment. The evidence supports that liquidity provision in the corporate bond markets is evolving away from the traditional commitment of dealer capital to absorb customer imbalances and toward dealers playing more of a matching role, and that post-crisis regulations focused on banking contributed.

Duffie, D., Zhu, H., 2016, Size Discovery, Forthcoming, Review of Financial Studies, Stanford University Graduate School of Business Research Paper No. 15-56.

Size-discovery mechanisms allow large quantities of an asset to be exchanged at a price that does not respond to price pressure. Primary examples include “workup” in Treasury markets, “matching sessions” in corporate bond and CDS markets, and block-trading “dark pools” in equity markets. By freezing the execution price and giving up on market-clearing, size-discovery mechanisms overcome concerns by large investors over their price impacts. Price-discovery mechanisms clear the market, but cause investors to internalize their price impacts, inducing costly delays in the reduction of position imbalances. We show how augmenting a price-discovery mechanism with a size-discovery mechanism improves allocative efficiency.

Lou, X., Shu, T., 2016, Price Impact or Trading Volume: Why is the Amihud (2002) Illiquidity Measure Priced?
The return premium associated with the Amihud (2002) measure is generally considered a liquidity premium that compensates for price impact. We find that the pricing of the Amihud measure is not attributable to the construction of the return-to-volume ratio that is intended to capture price impact, but driven by the trading volume component. Additionally, the high-frequency price impact and spread benchmarks are priced only in January and do not explain the pricing of the trading volume component of the Amihud measure. Further analyses suggest that the trading volume effect on stock return is due to mispricing, not compensation for illiquidity.

Harris, L., 2015, Transaction costs, trade throughs, and riskless principal trading in corporate bond markets
This study analyzes the costs of trading bonds using previously unexamined quotations data consolidated across several electronic bond trading venues. Much bond market trading is now electronic, but the benefits largely accrue to dealers because their customers often do not trade at the best available prices. The trade through rate is 43%; the riskless principal trade (RPT) rate is above 42%; and 41% of customer trade throughs appear to be RPTs. Average customer transaction costs are 85 bp for retail-size trades and 52 bp for larger trades. Estimated total transaction costs for the year ended March 2015 are above $26 billion, of which about $0.5 billion is due to trade-through value while markups on customer RPTs transfer $0.7 billion to dealers. Small changes in bond market structure could substantially improve bond market quality.

Black J. R., Stock D., and Yadav P. K., 2014, The Pricing of Liquidity Dimensions in Corporate Bonds
Kyle (1985) and Harris (2003) define three dimensions of liquidity – cost, depth, and time. This study is the first to examine the non-default component of corporate bond yield spreads in order to determine the importance of these three dimensions to investors. We find that while illiquidity premia in bonds varies with each individual dimension, the cost dimension is the biggest contributor to illiquidity premia, followed by the time dimension, and lastly, depth. We also examine whether market-wide or only bond-specific liquidity measures affect the value of corporate debt, and find that not only do market-wide liquidity measures affect the value of debt, but they are actually more important than bond-specific measures. Finally, we examine whether the non-default component of yield spreads is comprised solely of the state tax and illiquidity premia.

Dick-Nielsen, J., Feldhütter, P. and Lando, D., 2011, Corporate bond liquidity before and after the onset of the subprime crisis, Journal of Financial Economics, vol. 103, issue 3, pp. 471-492.
This study analyses liquidity components of corporate bond spreads by combining the superior data quality of transaction-level corporate bond prices from TRACE with the increase in bond spreads caused by the crisis. We find that before the crisis, the contribution to spreads from illiquidty was small for investment grade bonds both measured in basis points and as a fraction of total spreads. The contribution increased strongly at the onset of the crisis for all bonds except AAA-rated bonds, which is consistent with a flight-to quality into AAA-rated bonds. Liquidity premia in investment grade bonds rose steadily during the crisis and peaked when the stock market declined strongly in the first quarter of 2009, while premia in speculative grade bonds peaked during the Lehman default and returned almost to pre-crisis levels in mid-2009.

Gabrielsen, A., Marzo, M., and Zagaglia P., 2011, Measuring market liquidity: An introductory survey
Asset liquidity in modern financial markets is a key but elusive concept. A market is often said to be liquid when the prevailing structure of transactions provides a prompt and secure link between the demand and supply of assets, thus delivering low costs of transaction. Providing a rigorous and empirically relevant definition of market liquidity has, however, provided to be a difficult task. This paper provides a critical review of the frameworks currently available for modelling and estimating the market liquidity of assets. We consider definitions that stress the role of the bid-ask spread and the estimation of its components that arise from alternative sources of market friction. In this case, intra-daily measures of liquidity appear relevant for capturing the core features of a market, and for their ability to describe the arrival of new information to market participants.

Bao, J., Pan, J., and Wang, J., 2010, The Illiquidity of Corporate Bonds
This paper examines the illiquidity of corporate bonds and its asset-pricing implications using an empirical measure of illiquidity based on the magnitude of transitory price movements. Relying on transaction-level data for a broad cross-section of corporate bonds from 2003 through 2009, we show that the illiquidity in corporate bonds is substantial, significantly greater than what can be explained by bid-ask spreads. We also find a strong commonality in the time variation of bond illiquidity, which rises sharply during the 2008 crisis. More importantly, we establish a strong link between our illiquidity measure and bond prices, both in aggregate and in the cross-section. In aggregate, we find that changes in the market level of illiquidity explain a substantial part of the time variation in yield spreads of high-rated (AAA through A) bonds.

Goyenko, R.Y., Holden, C.W., and Trzcinka, C.A., 2009, Do liquidity measures measure liquidity? Journal of Financial Economics, vol. 92, pp. 153–181.
Given the key role of liquidity in finance research, identifying high quality proxies based on daily (as opposed to intraday) data would permit liquidity to be studied over relatively long timeframes and across many countries. Using new measures and widely employed measures in the literature, we run horseraces of annual and monthly estimates of each measure against liquidity benchmarks. Our benchmarks are effective spread, realized spread, and price impact based on both Trade and Quote (TAQ) and Rule 605 data. We find that the new effective/realized spread measures win the majority of horseraces, while the Amihud [2002. Illiquidity and stock returns: cross-section and time-series effects. Journal of Financial Markets 5, 31–56] measure does well measuring price impact.

Tian, Y., 2009, Market Liquidity Risk and Market Risk Measurement
The main aim of the thesis is to formulate a concept of liquidity risk and to incorporate market risk measurement with liquidity risk for improvement. To this end, we first review two types of liquidity risk and the relation between liquidity risk and market risk. The thesis is based on a new framework of portfolio theory introduced by Acerbi. According to this formulation, the liquidity of the assets consisting a portfolio is built into the value of that portfolio via a so-called liquidity policy. Under the new framework, the valuation of a portfolio becomes a convex optimization problem. As our own contribution, some examples of calculation schemes for the convex optimization problem are given (see Chapter 5). Equipped with the new portfolio theory, we can quantify market liquidity risk and introduce a new kind of risk measure which includes the impact of liquidity risk.
Market studies
ICMA, 2020, The European investment grade corporate bond secondary market & the COVID-19 crisis
This report documents the performance of the investment grade secondary bond market in Europe during the last weeks of February through March and April 2020, as the COVID-19 pandemic caused levels of market volatility and dislocation surpassing those seen during the global financial crisis of 2007-2008. The report is based on market data as well as interviews and surveys of buy-side and sell-side market participants.

ICMA, 2020, Time to act: ICMA’s 3rd study on the state of the European investment grade corporate bond secondary market
Based on quantitative market data, stakeholders surveys, as well as in interviews with market participants, the study looks at the current state of market liquidity; the evolution of market structure; and participants’ expectations for future developments in the market. It compares market conditions and developments since the previous 2016 study, as well as the 2017 reports of the European Commission’s Expert Group on Corporate Bond Markets. The study concludes that secondary market liquidity conditions remain challenged, and have deteriorated since 2016. It also examines the key trends and developments in market structure over the past three years, including evolving market behaviour and the adoption of new trading protocols, as well as the impacts of regulation and monetary policy. Looking forward, it identifies potential opportunities through new technologies and the use of data, as well as further challenges to liquidity, not least as a result of higher capital charges for market makers, as a result of the Fundamental Review of the Trading Book (FRTB), and the implementation of the Central Securities Depositories Regulation (CSDR) mandatory buy-in regime. The report encourages policy makers, regulators, and stakeholders to build on the work undertaken by the European Commission’s Expert Group in order to prevent further declines in market liquidity and to ensure the continued development of Europe’s corporate bond market.

ISDA, 2019, Global Credit Default Swaps Market Study
ISDA’s analysis of the credit default swaps (CDS) market reveals that market activity in single-name CDS has been stable since 2016. However, a relatively small number of reference entities account for a large proportion of transactions. Market activity in index CDS leveled off in 2016, and has been on an upward trend since the beginning of 2017. This analysis explores credit derivatives market size from the start of 2014 until the middle of 2019, using data from the Depository Trust & Clearing Corporation (DTCC) Trade Information Warehouse (TIW).

Amundi, 2019, How investors should deal with the liquidity dilemma
The report posits that assuming that different asset classes should remain liquid at any time can fuel a false sense of security and result in a lack of preparation for future possible tensions. This issue is in part due to the fact that liquidity has been poorly defined, with confusion between macro (the systemic liquidity provided by central banks) and micro (market liquidity at asset class levels) liquidity. It conludes that when liquidity is low and market impact might be significant, the only efficient approach is to source liquidity from all available sources. Hence, being big means having a global trading organisation capable of ensuring the best mix of connectivity to liquidity venues and relationships with counterparties to ensure as many liquidity touch points as possible.

Citi, 2018, Developments in credit market liquidity
This presentation prepared for the inaugural FIMSAC meeting in January 2018 describes developments in US credit market liquidity from the perspective of macro themes, microstructure, and market structure considerations. It concludes that credit remains a predominantly principal market, that a myriad of influences have led to a loss of heterogeneity, and that it is prudent to focus on building robust infrastructure.

ICMA, 2018, The Asia-Pacific Cross-Border Corporate Bond Secondary Market - A report on the state and evolution of the market
The report highlights the rapid rise in issuance and the size of the G3 (in particular USD) corporate bond market since 2011, which has accelerated in the past two years driven primarily by Chinese financial and non-financial issuers coming to the market. From 2011 to 2017, annual G3 APAC corporate issuance has more than trebled to over USD 930bn, with Chinese names accounting for more than 40% of total issuance in 2017, compared with less than 20% in 2011. The report sets the size of the market at May 2018 at approximately 8,500 outstanding issues with a nominal value of almost USD 2.5 trillion.

ICMA, 2018, The European Corporate Single Name Credit Default Swap Market - A study into the state and evolution of the European corporate SN-CDS market
The report is based on interviews with market participants, including buy-side users, as well as extensive data and quantitative analysis. It sets out to map the state of the market, establishing who are its main users and what benefits and risks are associated with the product. Concentrating on the European corporate SN-CDS market it looks at where and how liquidity is provided, and the related costs and challenges of the CDS product.

ICMA, 2017, The European Credit Repo Market: The cornerstone of corporate bond market liquidity
The report explores and describes the state and evolution of the European corporate bond repo and securities lending market (the ‘credit repo market’). The study builds on ICMA’s previous work with respect to both corporate bond market and repo market evolution and liquidity, and investigates the European credit repo market from the perspective of its role, structure, participants, dynamics, external impacts, challenges, opportunities, and potential evolution, particularly to the extent that this plays a pivotal role in overall corporate bond market liquidity.

Axa Investment Managers (TSF Fixed Income Trading), 2017, Fixed Income Liquidity: A look back at our historical trading data
A retrospective analysis of our trading data has enabled us to produce this document with information that we believe factual on TSF Trading desk. It is undisputable that market structure has changed along with lower capacity of banks to warehouse bonds due to new regulatory framework and more stringent risk constraints; however, our statistics come challenging the general perception of a major breakdown in corporate bond secondary market and attempt to shade a different light on the matter in line with latest reports, published end of August 2016, from ESMA and IOSCO.

Vanguard, 2016, Innovation and evolution in the fixed income market
At first blush, it may appear as though the fixed income market is less liquid than it has been in the past. Corporate bond markets have grown considerably over the last several years, just as dealers’ appetite to hold bonds in inventory to facilitate trades has diminished. This shift in dynamics, though undeniable, is not a harbinger of doom, nor is it the end of the story. Rather, it’s the beginning of a new chapter that highlights the resiliency of the financial markets and the imagination of many of its participants. The market and its participants are doing what they always do – adapting, innovating, and evolving.

CFA Institute, 2016, Secondary Corporate Bond Market Liquidity Survey Report
To inform policy developments related to bond market liquidity, CFA Institute conducted a survey of a pool of its members across the globe that have expressed interest and expertise in this topic. Respondents from the Americas region and EMEA report that over the last five years they have observed (i) a decrease in the liquidity of high‐yielding and investment‐grade corporate bonds and no change in the liquidity of government bonds; (ii) a decrease in the number of active dealers making markets; (iii) an increase in the time taken to execute trades and a lower proportion of bonds being actively traded; (iv) a higher proportion of unfilled orders. These respondents also noted that bank capital and liquidity regulations have had a significant impact on bond market liquidity and that the focus of policymakers should be on removing impediments to the smooth functioning of institutional wholesale markets.

ISDA, 2016, Single-name Credit Default Swaps: A Review of the Empirical Academic Literature
Single-name credit default swaps (“CDSs”) are derivatives based on the credit risk of a single borrower such as a corporation or sovereign. Although the single-name CDS market expanded rapidly during the period of loose monetary policy and expanding credit from 2002 through 2007, its growth began to slow after the global credit crisis and during the Eurozone sovereign debt crisis in 2010 and 2011, after which the single-name CDS market began to contract. In recent years and despite deliberate efforts by the International Swaps and Derivatives Association (ISDA) and market participants on both the buy and sell sides, the single-name CDS market shifted from stagnating growth to an actual contraction and has shrunk substantially.

BlackRock, 2016, Addressing Market Liquidity: A broader perspective on today’s Euro corporate bond market, ViewPoint August 2016
This ViewPoint is a continuation of previous BlackRock publications addressing market liquidity and the ownership of the world’s financial assets, focusing specifically on euro denominated debt, including corporate bonds. It highlights several aspects of the Euro corporate bond market that have been missing from the dialogue including: (i) The diversity of asset owners, each with unrelated objectives and constraints that result in different investment behaviours in response to changing market conditions. (ii) Built-in demand for bonds as Central Banks, insurers, and some pension funds must reinvest dividends and principal to keep balance sheet assets invested, in addition to potential demand from insurers and pension funds seeking higher yields when interest rates rise. (iii) Gradual shift from loans to bonds in euro area compensates for the reduced capacity of banks to provide financing.

ICMA, 2016, Remaking the corporate bond market: ICMA’s 2nd study into the state and evolution of the European investment grade corporate bond secondary market
The report explores the evolution of the European investment grade corporate bond market and updating the earlier research. It adds quantitative input to the in-depth interviews with market participants and provides recommendations to support the long-term efficiency and functioning of the market.

Vanguard, 2016, Clear perspectives on bond market liquidity
Since the global financial crisis, new regulations and low interest rates have led to changes in the bond market. This has raised concerns that in periods of market stress, bond fund investors will panic and redeem their shares. Mutual funds would then struggle to find the liquidity to convert their holdings into cash. Our experience suggests reasons for optimism about the bond market’s ability to match buyers and sellers as different needs arise. Liquidity is dynamic. It has a price that changes with market conditions. Participants in large, broadly diversified markets consistently manage to find a market-clearing price for high-quality securities.

BlackRock, 2016, Addressing Market Liquidity: A Broader Perspective on Today’s Bond Markets, ViewPoint February 2016
The data shows that bond markets are undergoing a structural change to liquidity: (1) Broker-dealer inventories have declined as dealers reduce balance sheet risk; (2) Bond turnover (trading volume as currently measured divided by outstanding debt) has declined; (3) Record corporate bond issuance reflects cheap money. However, this is only a partial picture of the current fixed income ecosystem: (1) Many asset owners have unrelated objectives and constraints that drive their behavior in disparate ways; (2) While bond ownership by open-end mutual funds and ETFs has grown, the majority of fixed income assets are owned by other types of asset owners; (3) Liquidity is not “free”: the cost of liquidity can increase when immediacy is needed or when market liquidity is scarce; (4) Market participants are adapting to changes in market liquidity and regulators are addressing liquidity risk management; (5) Bond turnover data omits critical elements of today's bond market structure. The growth of bond ETFs and secondary market trading of bond ETF shares are important new developments.

Vanguard, 2016, Innovation and evolution in the fixed income market
The paper identifies several key improvements to help electronic trading continue to evolve in ways that are most beneficial to investors. It advocates for policies and practices that (i) limit the fragmentation of trading, (ii) encourage direct interaction between buyers and sellers, (iii) better link trading and order-management systems, (iv) provide greater price transparency, and (v) protect against information leakage.

AllianceBernstein, 2016, Playing With Fire – The Bond Liquidity Crunch And What To Do About It
The paper attempts to explain what is behind the so-called ‘liquidity drought’, what investors can do to protect themselves, and, potentially, profit. It suggests that successful investing should not rely solely on liquidity, and that those who can ‘keep their cool’ amidst declining liquidity can be profitable.

PWC, 2015, Global financial markets liquidity study
The study finds specific areas where market liquidity has declined, and warning signs that more significant declines may be masked by other factors. These include: (i) Difficulties in executing trades: Market participants are still generally able to execute the trades they require, but the time taken and effort required to execute both with dealers and across multiple platforms has increased. (ii) Reduction in market depth: There are signs of declining depth and immediacy in capital markets as characterised by falling transaction sizes. (iii) Increase in volatility: There is evidence that episodes of market correction and volatility are now rising, after falling considerably since the global financial crisis. Volatility in bond markets in 2015 is around 40% higher than in 2014. (iv) Bifurcation in liquidity: There is market evidence to suggest that a “bifurcation” is taking place across some markets. Liquidity is increasingly concentrating in the more liquid instruments and falling in less liquid assets.

ICMA, 2014, The current state and future evolution of the European investment grade corporate bond secondary market: perspectives from the market
The report is based on in depth interviews with market participants represented by ICMA, including investors, issuers, banks and broker-dealers, intermediaries and infrastructure providers, looking at the challenges faced by the European investment grade bond market and how the market is adapting to rapid change driven by extraordinary monetary policy and unprecedented regulation. Its focus is specifically on market liquidity.
Regulators’ studies
ECB, 2020, Risk and return in international corporate bond markets
Corporate bond returns in the major developed economies increase with risk, as measured by maturity and ratings. From a pricing perspective, the researchers find little to no evidence against the World CAPM model, where the market consists out of equity, sovereign and corporate bonds. However, from a factor model perspective, local factors contribute substantially more to the variation of corporate bond returns than global factors. The factor exposures show intuitive patterns: as ratings worsen, equity betas show a hockey stick pattern, sovereign betas decline monotonically and corporate bond betas increase steeply.

ESRB, 2020, A system-wide scenario analysis of large-scale corporate bond downgrades
The report considers two scenarios that are characterised by an increasingly large percentage of bonds being downgraded, both accompanied by the same severe yield shock.5 Using these two scenarios, the report then analyses (i) direct losses occurring owing to increases in yields, (ii) the amount of forced sales of fallen angels that could potentially result from these downgrades, and (iii) the possible extent of the price impact (and hence additional losses) of these forced sales on all bond holders. The analysis applies three different behavioural scenarios regarding how financial institutions might react, as well as two regimes of potential price impacts (“low market liquidity and high price impact” and “high market liquidity and low price impact”).

BIS, 2020, Corporate credit markets after the initial pandemic shock
Corporate funding markets partially resumed after seizing up in mid-March 2020 – but at much higher spreads and with sharper sectoral differentiation.  In March, wide spreads for highly rated energy firms pointed to significant downgrade risk. Post-GFC leverage build-up amplified the damaging effects of financial stress during the pandemic. The unusually broad impact of the pandemic shock on lower-rated firms threatens CLO structures, though not as much as the bursting of the housing bubble undermined CDOs.

ESRB, 2020, Issues note on liquidity in the corporate bond and commercial paper markets, the procyclical impact of downgrades and implications for asset managers and insurers
The onset of the COVID-19 pandemic saw a significant deterioration in corporate bond market liquidity, particularly in the high-yield (HY) segment. The impairment of market liquidity has been most visible in the sharp widening of bid-ask spreads, which were higher than they were at the peak of the Global Financial Crisis for the HY segment during March and April. Since the end of April, bid-ask spreads have only slightly decreased. For the BBB segment, the bid-ask spreads are somewhat lower than during the peak of the Global Financial Crisis. 25% of corporate bonds have been traded at distressed levels (i.e., where the option-adjusted spread is greater than 1,000 basis points) and 80% at spreads above 500 basis points.

BIS, 2020, The recent distress in corporate bond markets: cues from ETFs
Amid widespread sell-offs in risky asset classes, corporate bond exchange-traded funds (ETFs) traded at steep discounts to underlying asset values in March.  Contributing factors were high market volatility, reduced risk-taking by dealers and investors’ reaction to policy decisions. Policy interventions that improve market functioning in a given sector can have temporary yet important spillovers to other segments through portfolio rebalancing by investors.

FCA and SEC, 2020, Bond liquidity and dealer inventories: Insights from US and European regulatory data
Most corporate bond research on liquidity and dealer inventories is based on the USD denominated bonds transactions in the US reported to TRACE. Some of these bonds, however, are also traded in Europe, and those trades are not subject to the TRACE reporting requirements. Leveraging our access to both TRACE and ZEN, the UK’s trade reporting system which is not publicly available, we find an overlap of about 30,000 bonds that are traded both in the US and in Europe. This paper examines how using the CUSIP-level information from TRACE and ZEN affects the computation of bond liquidity metrics, dealer inventories, and the relationship between the two. It finds that in the combined dataset, the weekly volume traded and number of trades are significantly higher than in TRACE: e.g., the average unconditional number of trades in investment-grade (high-yield) bonds is 17% (20%) higher and the average unconditional volume traded is 15% (17%) higher when we incorporate the information from ZEN. The research finds a strong positive relationship between inventories and liquidity, as proxied by the trading activity metrics (i.e., number of trades, zero trading days, or par value traded) in TRACE data, and this result carries over to the combined dataset. When measuring bond liquidity with the Amihud ratio, the researchers find strong relationships in both TRACE and ZEN but of opposite signs: greater (lagged) inventories result in higher liquidity in the US but lower liquidity in Europe. The two effects offset each other and significance disappears in the combined dataset. The study concludes that (i) neither of the individual datasets paints a complete picture of the effects of dealer inventories on bond market liquidity, (ii) the measures based on the combined dataset appear more precise in describing the market characteristics, and (iii) data sharing across transaction reporting databases would allow a variety of stakeholders to gain a more accurate understanding of the liquidity and dealer inventories in global bond markets.

Bank of England, 2019, Securities settlement fails network and buy in strategies
In the context of securities settlement, a trade is said to fail if on the settlement date either the seller does not deliver the securities or the buyer does not deliver funds. Settlement fails may have consequences for the parties directly involved and for the system as a whole. Chains of fails, for example, could lead to gridlock situations and large volume of fails can affect the liquidity and smooth functioning of financial markets. In this paper, the researchers consider UK government bonds (gilts) and UK equities settlement data to examine the determinants of settlement fails and to explore the network characteristics of chains of settlement fails with the aim of identifying an optimal strategy to conduct a buy in process that could resolve cascades of fails.

OFR, 2019, The Effects of the Volcker Rule on Corporate Bond Trading: Evidence from the Underwriting Exemption
Using a novel within-dealer, within-security identification strategy, the paper examines intended and Unintended effects of the Volcker rule on covered firms' corporate bond trading using dealer identified regulatory data. The researches use the underwriting exemption to isolate the Volcker rule's effects separate from other post-crisis changes in bank regulation and broader trends in market liquidity. The research finds no evidence of the rule's intended reduction in the riskiness of covered firms' trading in corporate bonds. It finds significant adverse liquidity effects on covered firms' corporate bond trading with 20-45 basis points higher costs for customers even for roundtrip trades of shorter duration. These effects do not appear to be transitional. The Volcker rule appears to have increased the cost of the liquidity provided by covered firms and has not decreased the liquidity risk exposure of covered firms. Finally, the Volcker rule has decreased the market share of covered firms. Customers appear to be trading more with non-bank dealers, who are exempt from the Volcker rule but also lack access to emergency liquidity support at the Fed's discount window.

Bank of England, 2019, Credit default swaps and corporate bond trading
Using regulatory data on CDS holdings and corporate bond transactions, the study provides evidence for a liquidity spillover effect from CDS to bond markets. Bond trading volumes are larger for investors with CDS positions written on the debt issuer, in particular around rating downgrades. The research uses a quasi-natural experiment to validate these findings. It also provides causal evidence that CDS mark-to-market losses lead to fire sales in the bond market. It instruments for the prevalence of mark-to-market losses with the fraction of non-centrally cleared CDS contracts of an individual counterparty. The monthly corporate bond sell volumes of investors exposed to large mark-to-market losses are three times higher than those of unexposed counterparties. Returns decrease by more than 100 bps for bonds sold by exposed investors, compared to same-issuer bonds sold by unexposed investors. The findings underline the risk of a liquidity spiral in the credit market.

Bank of England, 2019, Resilience of trading networks: evidence from the sterling corporate bond market
The paper studies the network structure and resilience of the sterling investment-grade and high-yield corporate bond markets. Using proprietary, transaction-level data, first it analyses the key properties of the trading networks in these markets. The study finds that the trading networks exhibit a core-periphery structure where a large number of non-dealers trade with a small number of dealers. Consistent with dealer behaviour in the primary market, the study finds that trading activity is particularly concentrated for newly issued bonds, where the top three dealers account for 45% of trading volume. Second, the research tests the resilience of these markets to the failure or paralysis of a key dealer, or to bond rating downgrades. It finds that whilst the network structure has been broadly stable and the market broadly resilient around bond downgrades over its 2012–2017 sample period, the reliance on a small number of participants makes the trading network somewhat fragile to the withdrawal of a few key dealers from the market.

ECB, 2019, Tracing the impact of the ECB’s asset purchase programme on the yield curve
The researchers trace the impact of the ECB’s asset purchase programme (APP) on the sovereign yield curve. Exploiting granular information on sectoral asset holdings and ECB asset purchases, they construct a novel measure of the “free-float of duration risk” borne by price-sensitive investors. They include this supply variable in an arbitrage-free term structure model in which central bank purchases reduce the free-float of duration risk and hence compress term premia of yields. They estimate the stock of current and expected future APP holdings to reduce the 10y term premium by 95 bps. This reduction is persistent, with a half-life of five years. The expected length of the reinvestment period after APP net purchases is found to have a significant impact on term premia.

Banco de España, 2019, Is market liquidity less resilient after the financial crisis? Evidence for US Treasuries
The paper analyses the market liquidity level and resilience of US 10-year Treasury bonds. Having checked that five indicators show inconclusive results on the liquidity level, the researchers fit a bivariate CC-GARCH model to evaluate its resilience, that is, how liquidity reacts to financial shocks. According to the results, spillovers from liquidity volatility to returns volatility and vice versa are more intense after the crisis. Further, the volatility persistence of both returns and liquidity becomes lower after the crisis. These results are consistent with the existence of more frequent short-lived episodes of high volatility and more unstable liquidity that is more prone to evaporation.

IOSCO, 2019, Liquidity in Corporate Bond Markets Under Stressed Conditions
The report, prepared by IOSCO´s Committee on Emerging Risks, examines how liquidity in secondary corporate bond markets tends to evolve when those markets experience stress. The report seeks to increase understanding of how stressed conditions may affect both bond and other financial markets and the financial system more broadly. The findings are drawn from a review of the literature on liquidity in corporate bond markets under normal and stressed conditions, an examination of past episodes of stress in corporate bond markets and discussions with a broad range of industry stakeholders. The report notes that changes in the structure of secondary corporate bond markets have altered the way that liquidity is provided in these markets. These changes result from such things as  post crisis regulations that have reduced the capacity of intermediaries to provide liquidity in secondary corporate bond markets; greater risk aversion on the part of intermediaries; the gradual introduction of electronic trading; and significant growth in the size of these markets resulting from central banks’ quantitative easing policies and low rates of return on other financial assets.

Bank of England, 2019, Simulating stress in the UK corporate bond market: investor behaviour and asset fire-sales
The researchers build a framework to simulate stress dynamics in the UK corporate bond market. This quantifies how the behaviours and interactions of major market participants, including open-ended funds, dealers, and institutional investors, can amplify different types of shocks to corporate bond prices. They model market participants’ incentives to buy or sell corporate bonds in response to initial price falls, the constraints under which they operate (including those arising due to regulation), and how the resulting behaviour may amplify initial falls in price and impact market functioning. The study finds that the magnitude of amplification depends on the cause of the initial reduction in price and is larger in the case of shocks to credit risk or risk-free interest rates, than in the case of a perceived deterioration in corporate bond market liquidity. Amplification also depends on agents’ proximity to their regulatory constraints. It further finds that long-term institutional investors (eg pension funds) only partially mitigate the amplification due to their slower-moving nature. Finally, the research concludes that shocks to corporate bond spreads, similar in magnitude to the largest weekly moves observed in the past, could trigger asset sales that may test the capacity of dealers to absorb them.

ECB, 2019, Institutional presence in secondary bank bond markets: how does it affect liquidity and volatility?
Using newly available information on euro area sectoral holdings of securities, the authors investigate to what extent the presence of institutional investors affects volatility and liquidity in secondary bank bond markets. They find that non-bank financial intermediaries, in particular MMFs, have a positive impact on secondary bank bond markets’ liquidity conditions, at the cost of significantly increasing volatility of daily returns. The effect translates to more than a 19% improvement in liquidity conditions and up to 57% increase in daily-return volatility, assuming MMFs hold about 10% of the notional amount in the secondary market of a representative euro area bank bond; and is relative to the impact the non-financial private sector has on markets.  Investment funds, insurance corporations and pension funds are found to similarly affect market conditions, though to a lesser magnitude. The authors find a trade-off between volatility and liquidity, where the stronger presence of institutional investors at the same time improves liquidity and increases volatility, suggesting that possible structural shifts in investor composition matter for market conditions and should be monitored by financial stability authorities.

BIS, 2019, Measuring corporate bond liquidity in emerging market economies: price- vs quantity-based measures
Prior research suggests that corporate bond issuance in emerging market economies increases when the markets exhibit substantial liquidity. While the Malaysian corporate bond market has grown dramatically over the last few decades, having now become one of the largest among emerging market economies, its liquidity has not progressed at a similar pace. Illiquidity may hamper access to local currency debt financing, so its measurement is an important topic for regulators and issuers. The paper investigates the liquidity of corporate bonds in Malaysia and find that quantity-based measures of liquidity appear more reliable than price-based measures. Low liquidity appears to characterise both conventional and Islamic corporate bonds in Malaysia.

ECB, 2019, Exploring the factors behind the 2018 widening in euro area corporate bond spreads
The paper concludes that the observed widening in euro area credit spreads in 2018 is less due to credit risk fundamentals, nor is it eurozone specific (eg the end of the CSPP was largely priced-in), but rather it was primarily driven by spillovers from the US and increased global risk aversion. The paper also decomposes euro area NFC spreads into credit risk fundamentals and excess bond premia, which is particularly revealing.

Federal Reserve Bank of New York, 2019, Tick Size Change and Market Quality in the U.S. Treasury Market
The paper studies a recent tick size reduction in the U.S. Treasury securities market and identifies its effects on the market’s liquidity and price efficiency. Employing difference-indifference regressions, the researchers find that the bid-ask spread narrows significantly after the change, even for large trades, and that trading volume increases. Market depth declines markedly at the inside tier and across the book, but cumulative depth close to the top of the book changes little or even increases slightly. Furthermore, the smaller tick size enables prices to adjust more easily to information and better reflect true value, resulting in greater price efficiency. Price informativeness remains largely similar before and after, suggesting that the reduction in trading costs does not result in increased information acquisition. However, there is clear evidence of an information shift from the futures market toward the smaller-tick-size cash market. Overall, it concludes that the tick size reduction improves market quality.

OECD, 2019, Corporate Bond Markets in a Time of Unconventional Monetary Policy
The increased use of corporate bonds has been supported by regulatory initiatives in many economies aiming at stimulating the use of corporate bonds as a viable source of long term funding for non-financial companies and an attractive asset class for investors. The increase in bond usage is also consistent with the objectives of expansionary monetary policy and the related unconventional measures by major central banks in the form of quantitative easing. Given the elevated risks and vulnerabilities associated with the current outstanding stock of corporate bonds, the paper seeks to understand how and to what extent today’s corporate bond markets may be influenced by different economic and public policy scenarios.

AMF, 2019, Measuring Liquidity on the corporate bond market
In this study, conducted by researchers commissioned by the Institut Louis Bachelier, the issue of corporate bond liquidity is explored – both the liquidity of securities and that of the corporate bond market as a whole resulting from the liquidity of these securities. The liquidity of securities is not easy to define, as it is a multidimensional concept. In a few words, and from a qualitative viewpoint, a security might be said to be liquid if it can be bought and sold in large quantities in a relatively short time, without affecting its price (excessively). The report concludes that to act upon the liquidity of the corporate bond market, changes need to be made to trading protocols, which means changing the roles of the various market participants (where possible switching from the current RFQ system to one more similar to an all-to-all CLOB system). Past failures show, however, that this will only be possible through an agreement/consortium between banks and/or asset managers.

BIS, 2019, Over-the-Counter Market Liquidity and Securities Lending
The paper studies how over-the-counter market liquidity is affected by securities lending. The authors 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, they 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. The paper also shows 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.

ESMA, 2018, Liquidity in fixed income markets – risk indicators and EU evidence
The paper finds that market liquidity has been relatively ample in the sovereign segment, potentially also due to the effects of supportive economic policies over more recent years. Meanwhile, the researchers also fail to find a systematic and significant drop in market liquidity in the corporate bond market in recent years, however, they do observe episodes of decreasing market liquidity when market conditions have deteriorated. Building on an econometric analysis to investigate the drivers of market liquidity in these markets, the researchers find that in the sovereign bond segment, bonds that have a benchmark status and are characterized by larger outstanding amounts tend to be more liquid while market volatility is negatively related to market liquidity. Outstanding amounts are the main bond-level drivers in the corporate bond segment. Moreover, in both segments, overall stressed financial markets conditions seem to be related to lower market liquidity in fixed income markets. Results hold when different samples (in terms of geography, maturity and market liquidity volatility) are taken into account in sovereign bond and corporate bond markets. With reference to corporate bond markets, the sensitivity of bond liquidity to bond-specific and market factors is larger when financial markets are under stress. In particular, bonds characterized by more volatile market liquidity are found to be more vulnerable in periods of market stress. This empirical result is consistent with the market liquidity indicators developed for corporate bonds pointing at episodes of decreasing market liquidity when wider market conditions deteriorate.

European Commission, 2017, Drivers of Corporate Bond Market Liquidity in the European Union
Recent studies have advanced widely differing views on the state of liquidity in the European corporate bond market. This report aims to provide comprehensive empirical evidence on how liquidity in this market has evolved. The research shows that turnover ratios and mean trade numbers have declined. It also shows that an increasing number of bonds are hardly traded at all, presumably gravitating towards the portfolios of long-term or even buy-and-hold investors. The researchers demonstrate that transactions cost indicators (bid-ask and effective spreads, round trip measures and market depth indicators) exhibit noticeable upward trends since 2014. Holding risk constant at the individual bond level, they demonstrate that costs of trading which rose in the crisis never subsequently decreased. Among long-run structural influences on liquidity, the report discusses technological innovations in the bond market and the growth of Electronic Trading Platforms (ETPs) as trading venues. It also discuss the implications for bond market liquidity of transparency rules, both pre- and post-trade. Finally, it examines influences on proxies for market-maker profitability including dealer inventories and compare the timing of changes in these proxies with regulatory changes. The research provides evidence that dealer inventories may have an impact on the secondary market pricing of debt

Federal Reserve Bank of New York, 2017, Dealer Balance Sheets and Bond Liquidity Provision
Do regulations decrease dealer ability to intermediate trades? Using a unique data set of dealer bond-level transactions, we link changes in liquidity of individual U.S. corporate bonds to dealers’ transaction activity and balance sheet constraints. We show that, prior to the financial crisis, bonds traded by more levered institutions and institutions with investment-bank-like characteristics were more liquid but this relationship reverses after the financial crisis. In addition, institutions that face more regulations after the crisis both reduce their overall volume of trade and have less ability to intermediate customer trades.

FCA, 2017, New evidence on liquidity in UK corporate bond markets

Using not only standard measures of liquidity but also measures of dealers’ ease of trading, we find there has been a decline in liquidity from mid-2014 onward. However, from a long-term perspective this reduction in liquidity appears moderate. Previous research conducted by the Chief Economist’s Department for the period 2008-2014, as well as reports by FINRA, the AMF and IOSCO covering similar time periods, found little evidence of a quantifiable deterioration in liquidity. In this note, we update our study by extending our analysis to include the period after 2014, as well as incorporating new data about orders and quotes. Our findings suggest […] that trading conditions have become somewhat more difficult over the past 18-24 months. Market participants may have to work harder today to complete a trade than in previous years.

IOSCO, 2017, Examination of Liquidity of the Secondary Corporate Bond Markets: Final Report
IOSCO conducted a study of the liquidity of the secondary corporate bond markets in IOSCO Committee 2 member jurisdictions, including the impact of structural and regulatory developments since 2004, with a particular focus on the period just prior to the financial crisis to 2015. Analysis of the data collected from IOSCO Committee 2 members regarding the corporate bond markets in their respective jurisdictions was challenging because of differences in data collection methods and scope, quality, consistency and availability. These differences made it difficult to aggregate and compare data across jurisdictions. Based on the totality of information collected and analysed, IOSCO did not find substantial evidence showing that liquidity in the secondary corporate bond markets has deteriorated markedly from historic norms for non-crisis periods.

ESRB, 2016, Market liquidity and market-making
There is a significant information gap in terms of financial reporting in the EU that hampers a full assessment of the level of market liquidity and any related systemic risks. This report contributes to the debate on market liquidity conditions by providing new evidence, in particular on market-making activities. The data provide a mixed picture with the results varying by asset market and the market liquidity indicator used. For asset classes other than corporate bonds, gross and net inventories have either increased or remained unchanged. However, for European corporate bond markets, gross and net inventories have declined since 2010, possibly indicating a reduced ability or willingness of market-makers to act as intermediaries in these markets.

FCA, 2016, Liquidity in the UK corporate bond market: evidence from trade data, Occasional Paper 14
We present evidence on the evolution of liquidity in the UK corporate bond market for the period 2008–2014. On the basis of a series of widely accepted liquidity measures, we document that there is no evidence that liquidity outcomes have deteriorated in the market, despite the decline in inventory of dealers in this period. If anything, the market appears to have become more liquid in recent years. We also document that there is little evidence that liquidity is having a larger effect on bond spreads now than a few years ago. We do not find evidence that liquidity has become more ‘flighty’ in response to shocks of a mild to moderate nature, as measures of liquidity risk do not increase over the period of analysis. However, we do not claim that there are no risks associated with liquidity. Our own analysis shows that liquidity is subject to considerable deterioration if the market is under severe stress; there was considerably less liquidity in 2009/10 than either before or after this period.

BIS, 2016, Hanging up the phone – electronic trading in fixed income markets and its implications, Quarterly Review, March 2016
This article explores drivers and implications of the rising use of electronic and automated trading in fixed income markets – a process we refer to as “electronification”. We take stock of the current state of electronic trading and how it has changed the market ecosystem, its resilience and its overall functioning. Trading in fixed income markets is becoming more automated as electronic platforms explore new ways to bring buyers and sellers together. In the most liquid markets, traditional dealers are increasingly competing with new market participants whose trading strategies rely exclusively on sophisticated computer algorithms and speed. Some dealers, in turn, have embraced automated trading to provide liquidity to customers at lower costs and with limited balance sheet exposure.

BIS (Markets Committee), 2016, Electronic trading in fixed income markets
Electronic trading in fixed income markets has been growing steadily. In many jurisdictions, it has supplanted voice trading as the new standard for many fixed income asset classes. Electronification, ie the rising use of electronic trading technology, has been driven by a combination of factors. These include: (i) advances in technology; (ii) changes in regulation; and (iii) changes in the structure and liquidity characteristics of specific markets. This report highlights two specific areas of rapid evolution in fixed income markets. First, trading is becoming more automated in the most liquid and standardised parts of fixed income markets, often importing technology developed in other asset classes. Second, electronic trading platforms are experimenting with new protocols to bring together buyers and sellers.

BIS, 2016, Fixed income market liquidity, CGFS Papers, no. 55
The report highlights that fixed income markets are in a state of transition. Dealers have continued to cut back their market-making capacity in many jurisdictions. Demand for market-making services, in turn, continues to grow. The effects of these diverging trends have, thus far, not manifested themselves in the price of immediacy services, but rather they are reflected in possibly increasingly fragile liquidity conditions. Key drivers of current trends in liquidity include the expansion of electronic trading, dealer deleveraging, arguably reinforced by regulatory reform, and unconventional monetary policies. Given the transitional state of fixed income markets, regulators appear to be facing a short-term trade-off between less risk-taking by banks and more resilient market liquidity. Yet, in the medium term, measures to bolster market intermediaries’ risk-absorption capacity will strengthen systemic stability, including through a more sustainable supply of immediacy services.

AMF, 2015, Study of liquidity in French bond markets
At a time when some participants are considering regulations as a constraint that has caused liquidity to dry up, this article describes the first findings of an AMF analysis on liquidity in French bond markets between 2005 and 2015. Based on trade data received by the AMF and bid-ask spreads data, a composite liquidity indicator was constructed. The results suggest that, after the two episodes of strong decline due to 2007-2009 and 2011 crisis, liquidity has improved steadily in French bond markets since the beginning of 2012 albeit without recovering its pre-crisis level (2005-2007). Liquidity also tends to be more concentrated in instruments that are either least risky or that offer the greatest market depth. However, this improvement of bond markets liquidity does not signify resilience in the event of shocks. This paper is a first presentation of the AMF analysis on bond markets liquidity and constitutes a work in progress.

IMF, 2015, Market Liquidity – Resilient or Fleeting? Global Financial Stability Report: Vulnerabilities, Legacies, and Policy Challenges: Risks Rotating to Emerging Markets, pp. 49-82.
This chapter explores developments in market liquidity and the role of liquidity drivers, with a focus on bond markets (Table 2.5). Structural changes, such as reductions in market making, appear to have reduced the level and resilience of market liquidity. Changes in market structures—including growing bond holdings by mutual funds and a higher concentration of holdings—appear to have increased the fragility of liquidity. At the same time, the proliferation of small bond issuances has likely lowered liquidity in the bond market and helped build up liquidity mismatches in investment funds. Standardization and enhanced transparency appear to improve securities liquidity.

BIS, 2014, Market-making and proprietary trading: industry trends, drivers and policy implications, CGFS Papers, no. 52
This report presents the Group’s findings. It identifies signs of increased liquidity bifurcation and fragility, with market activity concentrating in the most liquid instruments and deteriorating in the less liquid ones. Drivers are both conjunctural and structural in nature, and it remains difficult at this stage to provide a definitive overall assessment. Yet, given signs that liquidity risks were broadly underpriced in the run-up to the financial crisis, it seems likely that the compressed pricing of immediacy services observed in the past will give way to liquidity premia more consistent with actual market-making capacity and costs. The report outlines a number of possible policy implications that, if pursued, would help making this outcome more likely and would support the robustness of market liquidity.
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