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Liquidity supply by broker-dealers and real activity

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  • Goldberg, Jonathan

Abstract

This paper develops a novel measure of liquidity supply by broker-dealers using data on their trading positions in Treasury bonds and the deviations of Treasury yields from a fitted yield curve. The measure is informative about liquidity in other asset classes, including corporate bonds and equities. A decline in liquidity supply predicts reduced debt issuance and investment by nonfinancial firms and reduced aggregate economic activity. The sensitivity of liquidity, issuance, and investment to broker-dealers’ liquidity supply is larger for firms with low credit quality. The results suggest that securities intermediaries are important for understanding liquidity commonality, corporate financing, and real activity.

Suggested Citation

  • Goldberg, Jonathan, 2020. "Liquidity supply by broker-dealers and real activity," Journal of Financial Economics, Elsevier, vol. 136(3), pages 806-827.
    • Handle: RePEc:eee:jfinec:v:136:y:2020:i:3:p:806-827
    DOI: 10.1016/j.jfineco.2019.11.006
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    2. Arun Gupta, 2021. "The Internal Capital Markets of Global Dealer Banks," Finance and Economics Discussion Series 2021-036, Board of Governors of the Federal Reserve System (U.S.).
    3. Jonathan Goldberg & Yoshio Nozawa, 2021. "Liquidity Supply in the Corporate Bond Market," Journal of Finance, American Finance Association, vol. 76(2), pages 755-796, April.
    4. Gupta, Arun, 2022. "The Internal Capital Markets of Global Dealer Banks," Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 4(3), pages 165-188, April.
    5. José Miguel Cardoso da Costa & Rui Albuquerque, 2023. "Price elasticity of demand and risk-bearing capacity in sovereign bond auctions," Working Papers w202302, Banco de Portugal, Economics and Research Department.
    6. Guimaraes, Rodrigo & Pinter, Gabor & Wijnandts, Jean-Charles, 2023. "The liquidity state-dependence of monetary policy transmission," Bank of England working papers 1045, Bank of England.

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    More about this item

    Keywords

    Broker-dealers; Treasury noise; Nonfinancial firms; Real effects of securities intermediation;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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