Economics, Econometrics and Finance
4 years ago

Post-crisis regulations lead to doubling of corporate bond liquidity premium.

SSRN Electronic Journal
Increasing Corporate Bond Liquidity Premium and Post-Crisis Regulations
Botao Wu

Paper Summary

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The study looked at corporate bond market liquidity after the financial crisis. Even though transaction costs have gone down, the liquidity premium has gone up. This means investors now demand higher compensation for trading illiquid bonds. Post-crisis regulations have made it more expensive for dealers to make markets, leading to longer trading delays. Bonds that used to sell quickly now take weeks to trade. The stricter capital requirements of Basel II.5 have had the biggest impact on increasing the liquidity premium and trading delays.