The Cost of Immediacy for Corporate Bonds

Abstract

Liquidity provision in the corporate bond market has become significantly more expensive after the 2008 credit crisis. Using index exclusions as a natural experiment during which uninformed index trackers request immediacy, we find that the price of immediacy has doubled for short-term investment-grade bonds, and more than tripled for speculative-grade bonds. In addition to this level effect, after the crisis, the supply of immediacy has become more elastic with respect to its price. These results are consistent with Duffie (2012)’s prediction that the post-crisis regulatory environment would hinder market making.