“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.
This week, we will publish a series of blog posts that shed light on the evolving nature of market liquidity. This follows an initial series of blog posts on market liquidity, published in August. We kick off the current series with a post that examines various measures of liquidity in the corporate bond market. The two following posts measure liquidity risk in the corporate bond, Treasury, and equity markets. We then examine the changing role of dealers by presenting estimates of returns to market making, and we consider the part played by dealers in supplying liquidity when mutual funds face redemptions. Finally, we examine the potential for increased uncertainty about the level of liquidity in markets where high-frequency trading is common.”