Staff Reports
Flighty Liquidity
Number 870
October 2018

JEL classification: C22, G12, G17

Authors: Nina Boyarchenko, Domenico Giannone, and Or Shachar

We study the conditional distribution of future liquidity in the secondary market for corporate bonds as a function of current liquidity. Increases in liquidity are persistent for investment-grade bonds and flighty for high-yield bonds. Greater liquidity of high-yield bonds is associated with lower uncertainty about future liquidity of investment-grade bonds, but greater liquidity of investment-grade bonds is associated with greater uncertainty about future liquidity of high-yield bonds. Finally, we show that measures of market-wide volatility and market-maker constraints do not contain information useful for predicting the distribution of future liquidity over and above that contained in the recent history of bid-ask spreads.

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AUTHOR DISCLOSURE STATEMENT(S)
Nina Boyarchenko
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. FINRA reviewed the results of the study prior to their dissemination to ensure that the confidentiality of the data was not unintentionally compromised. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Domenico Giannone
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. FINRA reviewed the results of the study prior to their dissemination to ensure that the confidentiality of the data was not unintentionally compromised. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Or Shachar
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. FINRA reviewed the results of the study prior to their dissemination to ensure that the confidentiality of the data was not unintentionally compromised. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.