The purpose of this paper is to contribute to the ongoing debate on liquidity in financial markets by shedding light on a market that has not been studied in depth. By leveraging the transaction level data available to the FCA as the national competent authority, we analyse the evolution of liquidity in UK corporate bond markets for the period 2008–2014. On the basis of a series of widely accepted liquidity measures, we document that, although the inventory of dealers has declined in this period, there is no evidence that liquidity outcomes have deteriorated in the market. If anything, the market has become more liquid in recent years.
We have published this Occasional Paper alongside an article Transaction data throws new light on corporate bond liquidity.
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.
Our claim is weaker: the regulatory interventions that have been introduced since the financial crisis did not result in less liquidity in normal times and did not result in liquidity being more ‘flighty’ when shocks of a mild nature hit the system.
We are putting forward this study as a contribution to the ongoing domestic and international debate on liquidity in financial markets in which various regulators and practitioners have been involved in the last few years.
Matteo Aquilina and Felix Suntheim.
Matteo Aquilina and Felix Suntheim work in the Chief Economist’s Department of the Financial Conduct Authority.
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