Liberty Street Economics   Liberty Street Economics
Liberty Street Economics
Return to Liberty Street Economics Home Page

45 posts on "Liquidity"

February 08, 2016

Has MBS Market Liquidity Deteriorated?



LSE_Blog_liquidity_460x288px_02

Mortgage-backed securities guaranteed by the government-backed entities Fannie Mae, Freddie Mac, and Ginnie Mae, or so-called “agency MBS,” are the primary funding source for U.S. residential housing. A significant deterioration in the liquidity of the MBS market could lead investors to demand a premium for transacting in this important market, ultimately raising borrowing costs for U.S. homeowners. This post looks for evidence of changes in agency MBS market liquidity, complementing similar posts studying liquidity in U.S. Treasury and corporate bond markets.

Continue reading "Has MBS Market Liquidity Deteriorated?" »

Posted by Blog Author at 7:02 AM in Financial Markets, Housing, Liquidity | Permalink | Comments (0)

Continuing the Conversation on Liquidity



LSE_Blog_liquidity_460x288px_01

Market participants and policymakers have raised concerns about market liquidity—the ability to buy and sell securities quickly, at any time, at minimal cost. Market liquidity supports the efficient allocation of financial capital, which is a catalyst for sustainable economic growth. Any possible decline in market liquidity, whether due to regulation or otherwise, is of interest to policymakers and market participants alike.

Continue reading "Continuing the Conversation on Liquidity" »

Posted by Blog Author at 7:00 AM in Financial Institutions, Financial Markets, Liquidity | Permalink | Comments (0)

December 07, 2015

Dealer Positioning and Expected Returns



LSE_2015_dealer-positioning_adrian_460_art

Securities broker-dealers (dealers) trade securities on behalf of their customers and themselves. Recently, analysts have pointed to the decline in U.S. dealers’ corporate bond inventories as evidence that dealers’ market making capacity is impaired. However, historically such inventories also reflect dealers’ risk management and proprietary trading activities. In this post, we take a long-term perspective on the evolution of dealers’ inventories of corporate bonds, Treasuries, and other debt securities and relate those inventories to expected returns in fixed-income markets in an effort to better understand the drivers of dealer positioning.


Continue reading "Dealer Positioning and Expected Returns" »

October 09, 2015

The Liquidity Mirage



Research_fp_liquidity_460x288px
Sixth in a six-part series

Market efficiency is often pointed to as a main benefit of automated and high-frequency trading (HFT) in U.S. Treasury markets. Fresh information arriving in the market place is reflected in prices almost instantaneously, ensuring that market makers can maintain tight spreads and that consistent pricing of closely related assets generally prevails. While the positive developments in market functioning due to HFT have been widely acknowledged, we argue that the (price) efficiency gain comes at the cost of making the real-time assessment of market liquidity across multiple venues more difficult. This situation, which we term the liquidity mirage, arises because market participants respond not only to news about fundamentals but also market activity itself. This can lead to order placement and execution in one market affecting liquidity provision across related markets almost instantly. The modern market structure therefore implicitly involves a trade-off between increased price efficiency and heightened uncertainty about the overall available liquidity in the market.

Continue reading "The Liquidity Mirage " »

Posted by Blog Author at 7:00 AM in Financial Markets, Liquidity | Permalink | Comments (3)

October 08, 2015

Redemption Risk of Bond Mutual Funds and Dealer Positioning



Fifth in a six-part series
Market participants have recently voiced concerns that bond markets seem to become illiquid precisely when they want to sell bonds. Some possible reasons for a decline in corporate bond market liquidity in times of stress include the increasing share of corporate bond ownership by mutual funds and the reduced share of corporate bond ownership by dealers. In this post, we examine the potential effects of outflows from bond mutual funds and the role of dealers’ positioning in corporate bonds.

Continue reading "Redemption Risk of Bond Mutual Funds and Dealer Positioning" »

Posted by Blog Author at 7:00 AM in Financial Institutions, Financial Markets, Liquidity | Permalink | Comments (0)

October 06, 2015

Has Liquidity Risk in the Treasury and Equity Markets Increased?



Third in a six-part series

Market participants have argued that market liquidity has deteriorated since the financial crisis. However, inspection of common metrics such as bid-ask spreads, market depth, and price impact do not show pronounced reductions in liquidity compared with precrisis levels. In this post, we argue that recent changes in liquidity conditions may best be described in terms of heightened liquidity risk, as opposed to general declines in liquidity levels. We propose a measure that shows liquidity risk has risen in equity and Treasury markets and discuss some factors behind the increase.


Continue reading "Has Liquidity Risk in the Treasury and Equity Markets Increased?" »

Posted by Blog Author at 7:05 AM in Financial Markets, Liquidity | Permalink | Comments (4)

Has Liquidity Risk in the Corporate Bond Market Increased?



Second in a six-part series
Recent commentary suggests concern among market participants about corporate bond market liquidity. However, we showed in our previous post that liquidity in the corporate bond market remains ample. One interpretation is that liquidity risk might have increased, even as the average level of liquidity remains sanguine. In this post, we propose a measure of liquidity risk in the corporate bond market and analyze its evolution over time.

Continue reading "Has Liquidity Risk in the Corporate Bond Market Increased?" »

Posted by Blog Author at 7:00 AM in Financial Markets, Liquidity | Permalink | Comments (0)

October 05, 2015

Has U.S. Corporate Bond Market Liquidity Deteriorated?



First in a six-part series
Commentators have argued that market liquidity has deteriorated in recent years as regulatory changes have reduced banks’ ability and willingness to make markets. In the corporate debt market, dealer positions, which are considered essential to good liquidity, have indeed declined, even as issuance and outstanding debt have increased. But is there evidence of reduced market liquidity? In previous posts, we discussed these issues in the context of the U.S. Treasury securities market. In this post, we focus on the U.S. corporate bond market, reviewing both price- and quantity-based liquidity measures, including trading volume, trade size, bid-ask spreads, and price impact.

Continue reading "Has U.S. Corporate Bond Market Liquidity Deteriorated?" »

Posted by Blog Author at 11:02 AM in Dealers, Financial Institutions, Financial Markets, Liquidity | Permalink | Comments (4)

Introduction to a Series on Market Liquidity: Part 2



Research_fp_liquidity_460x288px

Market participants and policymakers have raised concerns about the potential adverse effects of financial regulation on market liquidity—the ability to buy and sell securities quickly, at any time, at minimal cost. Market liquidity supports the efficient allocation of capital through financial markets, which is a catalyst for sustainable economic growth. Changes in market liquidity, whether due to regulation or other forces, are therefore of great interest to policymakers and market participants alike.

Continue reading "Introduction to a Series on Market Liquidity: Part 2" »

Posted by Blog Author at 11:00 AM in Dealers, Financial Markets, Liquidity, Regulation | Permalink | Comments (0)

August 20, 2015

The Evolution of Workups in the U.S. Treasury Securities Market



Fourth in a five-part series
The market for benchmark U.S. Treasury securities is one of the deepest and most liquid in the world. Although trading in the interdealer market for these securities is over-the-counter, it features a central limit order book (CLOB) similar to that found in exchange-traded instruments, such as equities and futures. A distinctive feature of this market is the “workup” protocol, whereby the execution of a marketable order opens a short time window during which market participants can transact additional volume at the same price. With the broadening of the interdealer market to include hedge funds and proprietary trading firms, and the increase in trading activity, some market participants consider the workup to be somewhat of an anachronism that is destined to lose its relevance relative to the CLOB. Contrary to this notion, we document the continued important role played by the workup, show some ways in which trading behavior in the workup has evolved, and explain some of the observed changes.

Continue reading "The Evolution of Workups in the U.S. Treasury Securities Market" »

Posted by Blog Author at 7:00 AM in Liquidity, Treasury | Permalink | Comments (0)
About the Blog
Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.

The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Donald Morgan, all economists in the Bank’s Research Group.

The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.


Economic Research Tracker

Liberty Street Economics is now available on the iPhone® and iPad® and can be customized by economic research topic or economist.


Useful Links
Comment Guidelines
We encourage your comments and queries on our posts and will publish them (below the post) subject to the following guidelines:
Please be brief: Comments are limited to 1500 characters.
Please be quick: Comments submitted after COB on Friday will not be published until Monday morning.
Please be aware: Comments submitted shortly before or during the FOMC blackout may not be published until after the blackout.
Please be on-topic and patient: Comments are moderated and will not appear until they have been reviewed to ensure that they are substantive and clearly related to the topic of the post. We reserve the right not to post any comment, and will not post comments that are abusive, harassing, obscene, or commercial in nature. No notice will be given regarding whether a submission will or will not be posted.‎
Disclosure Policy
The LSE editors ask authors submitting a post to the blog to confirm that they have no conflicts of interest as defined by the American Economic Association in its Disclosure Policy. If an author has sources of financial support or other interests that could be perceived as influencing the research presented in the post, we disclose that fact in a statement prepared by the author and appended to the author information at the end of the post. If the author has no such interests to disclose, no statement is provided. Note, however, that we do indicate in all cases if a data vendor or other party has a right to review a post.
Archives