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Federal Reserve Bank of New York
Staff Reports
Flighty liquidity
Nina Boyarchenko
Domenico Giannone
Or Shachar

We study how the risks to future liquidity flow across corporate bond, Treasury, and stock markets. We document distribution “flight-to-safety” effects: a deterioration in the liquidity of high-yield corporate bonds forecasts an increase in the average liquidity of Treasury securities and a decrease in uncertainty about the liquidity of investment-grade corporate bonds. While the liquidity of Treasury securities both affects and is affected by the liquidity in the other two markets, corporate bond and equity market liquidity appear to be largely divorced from each other. 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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Nina Boyarchenko & Domenico Giannone & Or Shachar, Flighty liquidity, Federal Reserve Bank of New York, Staff Reports 870, 01 Oct 2018, revised 01 Mar 2019.
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Keywords: corporate bond liquidity; liquidity uncertainty; quantile regressions
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