When failure is an option: Fragile liquidity in over-the-counter markets

• 成果类型: Article
• 署名作者: Hendershott, Terrence; Li, Dan; Livdan, Dmitry; Schurhoff, Norman
• 署名单位: University of California System; University of California Berkeley; Federal Reserve System - USA; Federal Reserve System Board of Governors; University of Lausanne; Swiss Finance Institute (SFI); Centre for Economic Policy Research - UK
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/j.jfineco.2024.103859
• 发表日期: 2024
• 关键词: liquidity; fragility; Cost of immediacy; Securities auctions; over-the-counter markets; Structured products; Collateralized loan obligations

摘要

Markets can give false impressions of liquidity and stability if failed attempts to trade are ignored. For collateralized loan obligations, we quantify this bias by estimating the total cost of immediacy (TCI) which incorporates failure rates and failure costs. TCI is substantially higher than the observed cost, 0.3-3.8% versus 0.04-0.12% across credit-quality tranches because trade failures are frequent, failure costs are large, and failure costs and rates are correlated. TCI is almost double the realized gains from trade for low-rated tranches. Overall, auction-based over-the-counter markets become illiquid and fragile, especially during stressful periods for low-rated assets.