Does Secondary Market Liquidity Affect the Economy?

Authors: Jixing Li, Matthew C. Ringgenberg

Abstract: We use the Federal Reserve’s Secondary Market Corporate Credit Facility (SMCCF) to examine whether secondary market liquidity has real economic effects. In response to COVID-19, the SMCCF committed the Federal Reserve to buy corporate bonds in secondary markets. Using a difference-in-differences analysis, we compare firms with bonds purchased by the SMCCF to similar firms that did not have bonds purchased. We find the SMCCF improved secondary liquidity and yields on newly issued bonds, however this did not impact firm’s overall cost of capital and had no effect on investment, employment, or PP&E. The results suggest secondary market liquidity has limited economic effects.