Dealer Liquidity Provision and the Breakdown of the Law of One Price: Evidence from the CDS–Bond Basis
研究了2005至2009年间做市商在公司债券市场中对错误定价的流动性提供行为，发现做市商通常稳定市场，但在亏损、价差扩大或融资恶化时会减少流动性提供，且套利平仓会加剧错误定价。
We examine dealers’ liquidity provision against mispricing in the corporate bond market from 2005 to 2009. Dealers on average serve as stabilizing liquidity providers by trading against widening price gaps between corporate bonds and credit default swaps (the CDS–bond basis). However, dealers cut back on liquidity provision as they suffer losses, mispricing becomes wider, or the funding situation worsens, consistent with the limited capital capacity of financial intermediaries. We also show that the unwinding of basis arbitrage trading can amplify mispricing by documenting that bond returns following the Lehman collapse were very low for bonds with strong preexisting basis arbitrage activity and for bonds underwritten by Lehman Brothers. Liquidity demand due to the exit of arbitrageurs can be a major driver of disruption in credit markets. This paper was accepted by Lauren Cohen, finance.