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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. Du, Wenxin & Hébert, Benjamin & Li, Wenhao, 2023. "Intermediary balance sheets and the treasury yield curve," Journal of Financial Economics, Elsevier, vol. 150(3).
    3. 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.).
    4. 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.
    5. 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.
    6. Albuquerque, Rui & Costa, José & Faias, Jose, 2022. "Price elasticity of demand and risk-bearing capacity in sovereign bond auctions," CEPR Discussion Papers 17095, C.E.P.R. Discussion Papers.
    7. 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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