Conference Agenda

Overview and details of the sessions of this conference. Please select a date or location to show only sessions at that day or location. Please select a single session for detailed view (with abstracts and downloads if available).

Session Overview
Room B: FMG 2
Thursday, 25/Mar/2021:
3:40pm - 5:00pm

Session Chair: Thomas Gehrig, University of Vienna

Show help for 'Increase or decrease the abstract text size'

Increasing Corporate Bond Liquidity Premium and Post-Crisis Regulations

Botao Wu

New York University, Stern School of Business, United States of America

Discussant: Fabian Hollstein (Leibniz University Hannover)

I employ corporate bond liquidity premium to understand the important changes in corporate bond market liquidity in the recent periods. I show that while the commonly-used transaction cost measures such as the bid-ask spread have been declining, corporate bond liquidity premium has actually increased since the financial crisis. For speculative bonds, about 30% of their yield spread is now compensation for illiquidity. To demonstrate that this increasing liquidity premium is due to investors facing longer trading delays as dealers have become less willing to provide immediacy, I develop an estimation of the latent trading delays implied by the size of the liquidity premium, and show that bonds that took less than one day to sell before the financial crisis now take weeks to trade. Finally, I establish a causal relationship between the major post-crisis regulations and the variations in the corporate bond liquidity premium. I show that Basel II.5 contributed the most to the increasing liquidity premium out of all regulatory changes over the sample period. The evidence is consistent with practitioners' description of the post-crisis market situation and corroborates the relevance of using liquidity premium to understand corporate bond market liquidity.

The Design of a Central Counterparty

Vincent Maurin1, John Kuong2

1Stockholm School of Economics, France; 2INSEAD, France

Discussant: Thomas Gehrig (University of Vienna)

This paper studies the benefits of central clearing and the design of a central counterparty (CCP) with an optimal contracting approach. Investors sign contracts to hedge an underlying exposure. There is counterparty risk because investors can default on the contract due to idiosyncratic shocks and moral hazard. Mutualization of losses can thus hedge against counterparty risk but demands collateral for preventing moral hazard. The optimal contract involves loss mutualization, which requires central clearing, only when the cost of collateral is intermediate. Furthermore, as loss mutualization dilutes investors’ incentives to monitor their counterparties, a third-party CCP can emerge as a centralized monitor and is given a first-loss, equity tranche as incentive compensation. Our results endogenize key features of the default resolution process, known as “default waterfall”, in a CCP. Finally, we show that larger user base of a contract favors central clearing (over bilateral trading) and clearing with third-party CCP (over member-owned CCP).