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Asset Pricing: Market and Funding Liquidity

Paper Session

Friday, Jan. 6, 2023 8:00 AM - 10:00 AM (CST)

Sheraton New Orleans, Borgne
Hosted By: American Finance Association
  • Chair: Lasse Pedersen, Copenhagen Business School, New York University, AQR Capital Management, and CE

Comparing Search and Intermediation Frictions Across Markets

Gabor Pinter
Bank of England
Semih Uslu
Johns Hopkins University


In intermediated markets, trading takes time and intermediaries extract rents. We estimate
a structural search-and-bargaining model to quantify these trading delays, intermediaries’
ability to extract rents, and the resulting welfare losses in government and corporate bond
markets. Using transaction-level data from the UK, we identify a set of clients who are active
in both markets. We exploit the cross-market variation in the distributions of these clients’
trading frequency, prices, and trade sizes to estimate our structural model. We find that trading
delays and dealers’ market power both play a crucial role in explaining the differences in
liquidity across the two markets. Dealers’ market power is more severe in the government
bond market, while trading delays are more severe in the corporate bond market. We find
that the welfare loss from frictions in the government and corporate bond markets are 7.8%
and 12.2%, respectively, and our decomposition implies that this loss is almost exclusively
caused by trading delays in the corporate bond market, while trading delays and dealers’
market power split the welfare loss equally in the government bond market. Using data from
the COVID-19 crisis period, we also find that these welfare losses might more than triple
during turbulent times, revealing the fragility of the OTC market structure.

Effects of Credit Expansions on Stock Market Booms and Busts

Christopher Hansman
Imperial College London
Harrison Hong
Columbia University
Wenxi Jiang
Chinese University of Hong Kong
Yu-Jane Liu
Peking University
Juanjuan Meng
Peking University


Credit expansions are commonly associated with elevated stock market valuations. However,
relative to other markets, isolating the causal relationship is challenging. Due to margin restrictions,
easy credit often leaks into stock prices in difficult-to-measure ways. We address
this by examining a large-scale deregulation in China that explicitly liberalized margin lending.Regression discontinuity and event study estimates show that this deregulation caused
a sizable increase in the level of asset prices, which was largely anticipated by unconstrained
investors. We develop an easy-to-estimate model of stock prices with anticipation to quantify
the importance of expectations regarding financial liberalizations and credit expansions.

Does Secondary Market Liquidity Affect the Economy?

Jixing Li
University of Utah
Matthew Ringgenberg
University of Utah


We use the Federal Reserve's Secondary Market Corporate Credit Facility (SMCCF) to examine whether secondary market liquidity has real economic effects. In response to COVID-19, the SMCCF committed the Federal Reserve to buy corporate bonds in secondary markets. Using a difference-in-differences analysis, we compare firms with bonds purchased by the SMCCF to similar firms that did not have bonds purchased. We find the SMCCF improved secondary liquidity and yields on newly issued bonds, however this did not impact firm's overall cost of capital and had no effect on investment, employment, or PP&E. The results suggest secondary market liquidity has limited economic effects.

Peter Feldhutter
Copenhagen Business School
Petri Jylha
Aalto University
Benjamin Knox
Federal Reserve Board
JEL Classifications
  • G1 - Asset Markets and Pricing