Regulations in the U.S. and bond market liquidity

Abstract

This paper investigates the impacts of financial regulations on bond market liquidity, focusing on the U.S. regulations such as the Dodd-Frank Act and the Volcker Rule. Our analyses at market level and bond level suggest that the mentioned regulations do not harm the liquidity of the bond market as a whole. It is evident that the regulations actually improve the bond market liquidity, especially for investment grade bonds. Non-investment grade bonds are not affected by changes in regulations. These findings are also evident in the event study of announcement effects regarding regulations milestones. The analysis also suggests that the transaction costs are affected by the changes in regulations more than the price impacts. Additionally, the event study indicates that the anticipation of regulatory changes do lead to lower liquidity but these impacts only occur for big milestones and eventually die out.