Study Finds Volcker Rule Has "Deleterious Effect" On Corporate Bond Liquidity

The Board of Governors of the Federal Reserve System staff members and a Cornell University finance professor examined the impact of the Volcker Rule on corporate bond illiquidity and dealer behavior during times of market stress. In a recent working paper, the authors concluded that the rule creates a less liquid market for corporate bonds because the dealers that are covered by it become "less willing" to offer liquidity during such times.

The economists focused on the downgrading of investment-grade corporate bonds due to the increased risk of "forced selling." They reported that:

• when compared to a control group of BB-rated bonds, downgraded bonds exhibited a "larger price impact of trading";