We examine portfolio trading and its impact on corporate bond liquidity. Our theoretical framework identifies how portfolio trades provide dealers with benefits through a diversification channel and with costs through a balance sheet channel. We then test empirically multiple hypotheses on the...

I show that if dealers are averse to holding inventory, then prices, liquidity, and dealers' inventory positions depend on inventory costs in negotiated over-the-counter markets. The solution to my dynamic equilibrium model rationalizes the following stylized facts in the US corporate bond...

This paper examines the effects of liquidity during the 2007-09 crisis, focussing on the senior tranche of the CDX.NA.IG Index and on Moody's AAA Corporate Bond Index. The aim is to understand whether these senior credit indices were discounted below fair value and to what extent this discount...

In this paper, we show both theoretically and empirically that the size of over-the-counter (OTC) markets can be reduced without affecting individual net positions. First, we find that the networked nature of these markets generates an excess of notional obligations between the aggregate gross...

We study the relationship between volatility and liquidity in the market for on-the-run Treasury securities using a novel framework for quantifying price impact. We show that at times of relatively low volatility, marginal trades that go with the flow of existing trades tend to have a smaller...

Liquidity is an important financial market characteristic, effecting portfolio decisions, and priced risk. During periods of market turmoil, such as occurs during financial crisis, investors have an elevated need for cash and so understanding how liquidity differs during those periods is...

The appropriate design of monetary policy in integrated financial markets is one of the most challenging areas for central banks. One hot topic is whether the increase in liquidity has contributed to the formation of price bubbles in asset markets in the years preceding the financial crisis. If...

The appropriate design of monetary policy in integrated financial markets is one of the most challenging areas for central banks. One hot topic is whether the rise in liquidity in recent years has contributed to the formation of price bubbles in asset markets. If strong linkages exist, the...

Central-bank collateral policy governs the convertibility of assets into central-bank money provided directly by the central bank. Focusing on government bonds, we develop clean identification of variation in such convertibility by exploiting differential treatment of same-country government...