Electronic Thesis and Dissertations UC Berkeley

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1 Eltoi Thsis d Dissttios UC Bkly P Rviwd Titl: Essys o th iil Bod kt tho: Wilkoff, S ikl t Dt: 1 Sis: UC Bkly Eltoi Thss d Dissttios Dg: Ph.D., Bsiss dmiisttio, Ph.D. PogmUC Bkly dviso(s): ff, Dwight Committ: Edlsti, Robt, Hlsly, Robt, Rbifld, Dil Pmlik: htt://sholshi.og//itm/t53f bstt: Coyight Ifomtio: ll ights svd lss othwis iditd. Cott th tho o oigil blish fo y ssy missios. Sholshi is ot th oyight ow fo dositd woks. L mo t htt:// Sholshi ovids o ss, sholly blishig svis to th Uivsity of Clifoi d dlivs dymi sh ltfom to shols woldwid.

2 Essys o th iil Bod kt By S ikl Wilko dissttiosbmittditilstisftioofth qimts fo th dg of Doto of Philosohy i Bsiss dmiisttio i th Gdt Divisio of th Uivsity of Clifoi, Bkly Committ i hg: Pofsso Dwight, Chi Pofsso Robt Edlsti Pofsso Robt Hlsly Pofsso Dil Rbifld Sig 1

3 Essys o th iil Bod kt Coyight 1 by S ikl Wilko

4 1 bstt Essys o th iil Bod kt by S ikl Wilko Doto of Philosohy i Bsiss dmiisttio Uivsity of Clifoi, Bkly Pofsso Dwight, Chi Th miil bod mkt is fiil mkt tht dos ot dw mh tttio fom dmis, shs, th govmt o titios. Howv, tht hgd tly wh th lgst ssio si th Gt Dssio imtd th U.S. oomy. Now vyo is stgglig to dstd two mjo qstios: 1) How do w mk to mkt bods i illiqid mkts? d ) Why 5% of w isss isd i mkt tht hs th lowst dflt t of y bod mkt oth th th tsy mkt? This dissttio xmis thos qstios i th ts. Th fist t, Th E t of Is o iil Bod Yilds, stdisth di btw isd d isd miil bod yilds. I fid tht lthogh som of tht di is ttibtbl to th t of is, oth hl oms fom slf sltio to is miilitis tht hoos to is di sigifitly fom miilitis who hoos ot to is. Withot otig fo th ltt slf sltio th is bfit s dvld. By fosig o miilitis with both otstdig isd d isd bods (mixd miilitis), I idtify tht i th -isis iod is fo sh miilitis ds miil bod yilds by bsis oits. Bt lysis of homogos miilitis vls th slf sltio t iss yilds by bsis oits. Howv, dig th t fiil isis, is otid to low yilds by bs, whs th slf sltio t isd yilds by 1 bsis oits. Ths, my wok xlis th t iitilly zzlig homo wh isd yilds os bov isd yilds. Th sod t, Th E t of Is o Liqdity, xmisliqidityith miil bod mkt dig th t fiil isis. I lyz th ts of is o liqidity fo miil bods d stimt how th ts of is hg wh th iss f loss of itl d tig dowgds. I ms

5 liqidity i th th wys most sitd fo illiqid mkts: th mihd ms, Roll s bid-sk ms, d tov. By ll th mss, both bfo d ft th fiil isis, bods with is lss liqid th bods withot is. I lso fid tht th liqidity of bods with is dss ov th fiil isis. Ths fidigs idit tht is dos ot imov liqidity. Th thid t, iil Bod kt Idx Bsd o Rt Sls thodology, itodstslsmthodologytotidxfothmiil bod mkt bsd o tstiol is, bs th t idis bsd o stimtd bod is. Th t sls mthodology llt idx fo y miil bod htisti. I t d lyz idis fo th miil bod mkt d st idis by tig, mtity, d htistis sh s is d bod ty (i.. Gl Obligtio o Rv). Rt sls mthodology is bsd o th ssmtio tht htistis of th bod do ot hg ov tim whih ms th movmts i bod is d to volvig mkt oditios. Iomthtslsidiswiththxistigmiilbodidisdfid th t sls idis highly oltd with th t idis with oltio of..

6 i To y Gdfth, vi Dvid Tlitz, Who tght m th vl of ti.

7 ii Cotts 1 Th E t of Is o iil Bod Yilds Itodtio Bkgod Litt Rviw Hyothss Dt thodology Th Bisd Vl of Is Th Ubisd Vl of Is Th Vl of Slf Sltio Robstss Chk Rslts Colsio Th E t of Is o Liqidity 3.1 Itodtio Bkgod Litt Rviw Siglig Ifomtio Dislos Clitl E ts Tx-bsd tiol Ngtiv Covi of Pi Chgs Nmb of Tds gggt Liqidity Fto Tstio Bsd Liqidity s Dt Hyothsis thodology Liqidity ss Liqidity Tsts

8 iii. Rslts Colsio iil Bod kt Idx Bsd o Rt Sls thodology Itodtio Bkgod Bod By Idis S&P Idis Rt Sls iil Bod kt Idx Di s Btw Idis Idx Possibilitis Dt thodology Disssio Rslts Colsio Biblioghy 4 4 dix 4.1 Fist ht Sod ht Thid ht

9 iv kowldgmts I m dly idbtd to my dissttio hi Dwight, d my ommitt mmbs Robt Edlsti, d Robt Hlsly. Dwight ws istmtl i ovidig sh ditio, ws gt mto d I old hv ot do it withot him. Robt Edlsti ws s idibl ol modl fo m d gv m itio fo wi. Robt Hlsly ws xtmly gos with his tim d fiil sot fo dt withot whih I wold ot hv hd thsis. I wold lik to giv sil thks to midjov d dw ozk withot whos hl I v wold hv gdtd o tim. Thy dsv sil thks bs thy obbly th oly ol otsid my dviso who d my whol dissttio. I wold lik to thk t d st lssmts: vd hmd, ds Doglo, Nth Gog, By Htm-Gls, S Holld, Ptish Ptl, dm Yo d my ohot (Bois, Hi, d im) fo givig m dvi, hl, d kig m s dig gd shool. By d Ti y dsv sil thks fo ovidig m with l to liv, big gt tithlo tmmt, d kig m lm dig my most stssfl tim. I m gtfl to shok Bdhm, Stt Gbil, Kim Gilfoyl, Cythi Koll, lxi Thistyi, im Wilox, th Fdl Rsv Bod, th Fish t st (Chls, Dbbi, Lid, th, d Thoms) fo thi hl d sfl disssios. I lso gtflly kowldg th Whit Fodtio, IBER d th Fish Ct fo fiil sot. I wold lik to thk my fmily fo ll thi lov d sot. y mom l I do ot hv th wods to xss my thks fo ll yo hv do fo m. Dd d Tss, fo yo lov, sot, hyosis d hl of yo fids. y sist Hily fo wys big th to tlk. D, I will miss big yo ighbo, hgig ot with yo d mkig vodo st. It ws i s ig thogh it ll t th sm tim s Dvid so I old hv som o with whom to ommist. I d with iddl fo thos i d of littl stiv. Wht gos o fo lgs i th moig, o two lgs t oo, d o th lgs i th vig?

10 1 Cht 1 Th E t of Is o iil Bod Yilds 1.1 Itodtio U.S. miilitis i isis. I Novmb 11, so Coty lbm, ov 4 billio dolls i dbt, fild th lgst miil bkty i U.S. histoy. Bt miilitis ot th oly titis fig bkty; th miil bod is idsty is i v gt fiil distss. Evy tim th hs b sigifit miil bod isis, sh s th Nw Yok dbt motoim of 15 o th Wshigto Pbli Pow Sly Sttio (WPPSS) dflt, th tg of th miil bod mkt tht is isd hs isd. I 5 this fig gw to 5% of th. tillio doll miil bod mkt. This tim, howv, s slt of ty ito th sttd fi mkt, th miil bod iss hv b ght i th isis. Wh th o ws idsty with sv td iss, ow oly two iss mi, o td ssd Gty d th oth td BBB+ BI. Th dowgds of th miil bod iss od wh is ws most dd, d this timig md Cogss qstio th bfit of miil bod is, whih is itdd to ovid low osts of fdig to miilitis. Th bility of miilitis to iss low ost dbt is imott to th fdl govmt, whih is why th is o fdl tx o miil bods d why fdl is ogm to bil ot th miil bod iss ws osidd i. Whil, tyilly, is is sd to d dflt isk, histoilly, ll S&P td miil bods hv mltiv dflt t of.%, d ivstmt gd bods, thos

11 most likly to b isd, hv mltiv dflt t of.%. Com this with oot bods, whih fims ot is d hv ovll mltiv dflt t of 1.%. Whil th govmt is ow tkig itst i th bfit of miil bod is, si th 1s, wh miil bod is sttd, dbt hs b ogoig s to whth o ot sh is ovids t bfit d, if tht is i ft th s, wh tht bfit oms fom. Th miil mkt hs ov 5, isss of tx-xmt sitis, d my fitios bst this mkt. Sh fitios ild th followig fo tgois. I th fist l, th is symmti ifomtio sd by th slow ts t whih miilitis dt d dislos ifomtio. Th sod fitio is th xist of st tig sls fo miil bods d oot bods. This fitio wold ot xist if gltios di titd btw sls istd of ttig tigs fom h sl s qivlt. Thid, whil miil bods xmt fom both fdl d stt txs, th bodhold mst b sidt of th stt th bod ws issd i to bfit fom th stt xmtio. Filly, th mjoity of bodholds i this mkt idividl ivstos who hold % of th mkt ditly s wll s iditly thogh mtl fds. I th st, yilds o isd bods w blow isd bod yilds; howv, tly this td hs vsd, d isd bod yilds ow gt th isd bod yilds, sggstig is iss yilds o miil bods. Pst sh ttibts th di i miil bod yilds to is. Howv, this is oblmti bs th is bfit dos ot ot fo th dlyig di s btw thos miilitis tht hs is d thos miilitis tht do ot hs is. Usig w idtifitio sttgy I domos yilds ito is omot, whih is th yild dtio ovidd by is, d slf sltio omot, whih is th yild hg ttibtbl to th di i miilitis who hoos to is. By otig fo miility ts, I stimt th t of miil bod is o miil bod yilds d xli wht sd yilds o isd miil bods to is bov yilds o isd miil bods. s xtd, th is t lwys ovids dtio i miil bod yilds, bt ot to stdd siglig modls, th sltio ito is iss yilds. I show tht isd yilds os bov isd yilds d to joit t of dli i th is bfit, sd by dliig dit qlity of th iss, d is i th sltio ito is t, sd by o bot th dlyig di btw miilitis who hs is d miilitis tht do ot hs is.

12 3 I th dt th two tys of miilitis: thos miilitis whih hv both isd d isd dbt otstdig, whih I f to s mixd miilitis, d thos miilitis with oly o ty of dbt otstdig (ith ll isd o ll isd), whih I f to s homogos miilitis. I w sttgy to sigl ot th is bfit I fos o mixd miilitis. By gssig th sd btw miil bods d Tsy bods o dmmy fo is d oth bod htistis, I fid tht is ovids yild dtio of ight bsis oits (bs). Si is mims o vg o d hlf bsis oits t bfit mis. By sig oly mixd miilitis I otol fo th idiosyti ts of th miility d sbsqtly stimt th bfit of hvig is. O th oth hd, stimtig th di btw isd yilds d isd yilds fo homogos miilitis givs vl tht otis th is bfit ls th slf sltio t. To obti th yild hg ttibtbl to th slf sltio t, I di i di gssio with th sd btw miil bods d Tsy bods o th lft-hd sid d ittio btw dmmy iditig is stts d dmmy to idtify if th miility is mixd o homogos o th ight hd sid, whil otollig fo bod htistis. It ts ot tht slf sltio iss yilds o isd bods by six bsis oits. This lysis is osistt with th dt dig th fiil isis. s iss dowgdd d go bkt, th is bfit stys t ight bsis oits whil th t of sltio ito is iss to 1 bsis oits. To otol fo bod htistis I fos o log tm, ollbl, fixd t, gl obligtio (GO), tx xmt bods with dlyig tig t th tim of th tstio. I fos o GO bods bs GO bods ovid fo th fll fith d bkig of th miility, wh if ssy, miilitis will is txs to y fo GO bods. By otst, v bods hv lim o th v of th ojt big fdd, bt hv o otsid os if th ojt fils. Th lim to sh flows will b th sm fo vy otstdig bod, wh s v bods will hv lims to di t sh flows. Thfo I stit my tttio to GO bods bs v bods lims to di t sh flows. Th st of th ods s follows. Stio 1. ovids bkgod o th stt d tiits of th miil mkt. Stio 1.3 viws xistig litt o miil bod mkts d dissss how my fidigs fit i th xistig litt. Stio 1.4 sts my hyothss bot th t of is o miil bods. Stio 1.5 viws th dt vilbl. Stio 1. dissss th mthodology fo stig is ts. Stio 1. sts d itts th

13 4 slts. Stio 1. olds. 1. Bkgod I viw slit fts of th miil bod mkt d miil bod is tht ssy to dstd how I idtify th vl of is. I disss th ol of miil bod iss d dit tig gis i th miil bod mkt. I lso xli why th bod iss wt bkt dig th t isis. Bod gts di fom oth tys of is i thi yot stt d th wy isss y fo th is. Nmly, giv miility mks o-tim fot ymt ot of th bod ods to th is who i t ovids is fo th lif of th bod. I s of dflt, th is otis th shdld itst d iil ymts til ith th miility sms ymts o th bod mts. If th miility is bl to sm ymts, it is qid to omst th is fo y missd ymts d id lgl fs. Wh miilitis wt to sll bod iss, th two wys i whih thy did who will dwit th iss. Thy ith s omtitiv o ig wh dwits bid o th iss fo sl d th lowst bid wis. I this s, th bid will ild y is ost so, if th bid with is is h th th bid withot is, th miil bod will hv is. lttivly gotitd o ig is wh th miility ditly iks dwit to sll th bod iss. Udwits do ot sbmit bids i th gotitd mthod, bt th th miility iks th dwit tht it fs to wok with. I th gotitd o ig th dwit woks with th miility o didig wh to iss th bods d dtmiig bod yilds. Whil th stdd ol of is is to ott gist th dflt isk; Hml (11), oody s ot, d S&P ot show tht th dflt obbility of ivstmt gd miil bods is lss th.1% goig bk to th 15 s. ost 1 dflts o i hosig d hlth miil bods. O ky bfit tht miil bod is ovids is imovd tig fo th miil bods. iil bods iv dit tig fom th di t dit tig gis (CRs): S&P, oodys d Fith. Th CR tigs simil bt I s dit tigs ovidd by S&P. S&P isss two tys of tigs: stddtig,whihisthtigthtomsssydithmt,d dlyig tig, whih is th tig of th miil bod withot is. 1 Tt, Emy, d V Pgh (1), Gbil Ptk d Wtso (11)

14 5 Uisd bods oly hv stdd tig. Fo isd bods miilitis hoos to hv stdd tig o both stdd d dlyig tig. If to th tig of th miility withot is s th dlyig tig. Iss o th oth hd iv thi ow tig. Th stdd tig of bod th fs to th high of th two tigs, ith th tig of th bod o th is. 1.3 Litt Rviw Ely miil sh fosd o swig if is td t bfit to miilitis. Th s stimt th t bfit of miil bod is bsd o omiso of isd d isd miil bod yilds. Two of th th s ms th t bfit of is bsd o t itst ost (ti), th itl t of t (IRR) of th bod iss tht sts th bod oo ymts ql to th bid i id by th dwit. Th thid mss th ost of is sig t itst ost (i) dfid s th vg l itst ost of w sil iss. Howv, th thos ommt tht ti is fd d tht simil gssios to thi hv b sig ti d do ot hv di ig slts. 3 Bswll, Nosi, d Bowig (1) gss ti o siz, mtity, o ig ty dmmy, GO dmmy, tig dmmis, miil bod idx d is dmmy. Th o it o th isd dmmy is thi stimt of th yild t of is whih thy fid to b ositiv bt ot sigifit ldig to thi olsio tht is is ot vl hig. Col d O (11) d Kidwll, Sos, d Whowiz (1) stimt gssio simil to th vios gssio fo isd bods withot th isd dmmy. Th thy ly th stimtd qtio to thi isd bod sml d itt th sidl s ms of th vl of is. Col d O (11) do ot ovid stimt of th svigs bt fid sigifit gtiv di btw th t itst ost with d withot is imlyig is ovids t bfit. Kidwll, Sos, d Whowiz (1) ilds is mim dt d stimts th t bfit of is to b fom -3. bsis oit fo td bods to 5 bsis oits fo BBB. Kidwll, Sos, d Whowiz (1) gos st fth by syig th ifomtiol symmty ovids th t bfit of is d tht th ifomtio symmty is gt s th dit qlity dlis. Th ky oit h is tht ll of ths Som miilitis hoos ot to gt td t ll i whih s th miil bods td. 3 Th thos tht s ti ssm th ost of is is ssd thogh to th dwits. Thfo th is mim will b fltd i high yilds. Both ti stdis ild llbl bods i thi smls.

15 stimt th is bfit withot otig fo th dlyig di btw miilitis tht hoos is d miilitis tht do ot hoos is. I this I do ot vlt if is is ost tiv bt I stimt th is bfit otig fo th iht di i isd d isd miilitis. oth limittio of th vios s is thi bility to lyz oly o is, BI. Qigly d Rbifld (11) hv th sm dt isss s th fomtiod s, bt thy tk dvtg of tim wh som bods issd withot is w sold o th ftmkt with is. This ms tht bods issd withot is w lt sold with is i th sody mkt lthogh ot ll th bods of iss w sold with is oly ftio of thm. This ovids gt tl ximt, omig isd d isd bods fom th sm iss, to stimt th bfit of is. Thy limit thi sml to bods withot ll ovisios d fid tht th t of is is sbsttil tig 14 to bs ds i tms of yilds. Qigly d Rbifld (11) stimt th t of is by gssig miil bod yilds o idis fo itst ts, dmmis to otol fo th iss d is dmmy. Thi sttgy is simil to mi i tht thy mth th bods by iss to otol fo ofodig ftos. Howv, I tk this o st fth by otollig fo bod htistis sh s llblility, bod ty, d mtity whil thi sttgy stimts th vl of is fo giv bod it th vgs th bfit ov ll th isss d th ftos jst mtiod old llow is to ovid lg bfit. lso bs thy lookig i th ftmkt fo is th bods tht ivstos hs is fo th bods whos miility hos ot to gt is stig thm fom th miility tht dd is. Whil this ovids stimt of th vl of is to isd ty it dos ot stimt th vl of is fo th ty tht ds is. ssmig th two tys do hv ihtly di t qlitis ths vls will b di t, this stimts th ltt vl. fw s ovid thoy xliig th bfit of is whil oths ovid miil tsts to xli di t mhisms thogh whih is ovids bfit. Thko (1) sts o of th fist thotil xltios fo dbt is. Thko s thid ty siglig modl lis to y mkt wh thid ty gth ifomtio to llvit lmos oblm, bt i od to look t qilibim h foss o dbt is. H sts th stdd lmos mkt with symmti ifomtio oblm wh isss kow thi ty bt th ivstos do

16 ot. I this modl thid ty ys f ddt o th iss ty to l th ty of th iss d th ss tht ifomtio to sll thm is. Th mot of is boght by th iss is isig i th qlity of th iss d th mim hgd is dsig i th qlity of th iss. H fids stig qilibim whby th highst qlity isss by th most is d i o-stig qilibim wh ll isss flly isd d th mkt itst t is th isk f t. Th isss bl to sigl thi qlity thogh thi hs of is. Thko (1) mks f to th ft tht th ty of is h is disssig is ol i th miil bod idsty. I Thko s modl isss did how mh is to by. I lity this modl dos ot hold bs miil bod is is ll o othig disio d miilly th highst qlity isss do ot by is. Howv, Thko s modl ovids mhism whby isss might by is fo th siglig bfit gdlss of y is bfit. Th slts i this sggst th mkt ivs th miility tht gts is to b th low ty ot to ditios i Thko (1). Thko s modl highlights th ft tht th di s btw th miilitis tht gt is d miilitis tht do ot gt is. I sggst miilitis ot siglig bt hsig is i od to d liqidity isk. Nd d Sigh (4) modl th is bfit s tx bitg. I thi modl th is is dflt f d by hsig is th xtd vl of th tx xmtio is isd bs th is boms th iss of th tx xmt dbt. Not vyo hs is bs th dowsid is ivstos o log hv tx loss bfit, fd to s itl loss, s th is o dflt fo isd miil bods. Th itly btw th isd tx bitg d th limitio of th itl loss dtmi who hss is. Thi modl sggsts tht is is mo likly fo miilitis with high ovy ts d fo giv dflt isk th disio to is dds o ovy t. y fidigs sggst tht th mkt is mo od bot gttig thi fll vl o th isd bods th th isd bods whih is oty to th ditio of Nd d Sigh (4). Howv, th modl I st is i li with thi miil fidigs i tht lg bod iss d log mtity is th bfit d liklihood of is. Thy lso fid tht is fo th to tigs is lss likly th fo th low td this is lso i od with my modl whih wold sggst lg liqidity gis to low td miilitis giv th litl t fo holdig ssts.

17 gl (14) ovids ovviw of th iddl sodig th xist of is d domts th ossibilitis ov whih is old ovid bfit. H olds tht is ovids bfit by isig th liqidity of miil bods. gl (14) dissss this slt bt dos ot ild modl o miil wok to sot his id. I follow thogh o his ojt by xmiig th diff btw th isd d isd go d sggstig modl by whih is is ssmd to is liqidity d ovid t bfit to miilitis who mo illiqid. I th t litt o miil bod is, Go, Shs, d Tzik (4) ovid vid tht is is lso tool fo ovidig ifomtio. Thy om ihig d Psylvi, two stts with di t lws o bod ifomtio dislos. Thy fid i Psylvi, wh gltios lss stigt, miilitis td to gmt th limitd disloss with is. I stts lik ihig with tight dislos lws, isss s lss is. Th ky oit is Go, Shs, d Tzik (4) ovid miil vid osistt with my fidigs. Wh it is mo ostly to dislos ifomtio miility hss is bt wh th mkt is mo ti bot miility, i. th miility is fod to dislos ifomtio, th liqidity bfit is dd d is is ot hsd. Dowig d Zhg (4) oit ot th miil mkt is lss tst th th qitis o fts mkts. Bs miilitis ot sbjt to th sm disloss s blily tdd ootios. Whil Dowig d Zhg s this ft to xmi th volm-voltility ltioshi i th miil mkt it is lso motivtio fo why th might b bfits to iss gthig ifomtio. Thy highlight imott oit fo why is is ot vlt i th oot mkt, th ft, tht th mkt hs ltivly to dt ifomtio bot fim t y giv tim. Diso (3) xmis mkt sgmttio thoy s th so fo miil bod is, th t of xss dmd fo low isk bods d xss sly of high isk bods. Th thoy sggsts tht th yild di til btw oody s td B d td will ifl th bfit of is d thfo th liklihood of gttig isd. Diso otibts to th miil fts o liklihood of is d fids th sd btw B d dos ot t th disio to is, bt fids th sly of bods i th mkt ts th is disio. Th lg th otstdig bod sly th mo likly th miility is to gt is. This fidig sots modl wh miilitis who hv liqidity

18 mim ssoitd with thm mo likly to gt is. I wokig (Li 11), Go Li xlos th id tht iss hv mo ifomtio bot miil bod dflt isk th dit tig gis. Li lims th mim hgd by iss to isss is mo t ms of bod qlity th th bods dlyig tig. Li (11) mss iss vltio of bod qlity by sig th is mi to dit tig dowgds, oxy fo dflts. oxy fo dflts is dd bs of th ity of dflt vts i th miil mkt. Is mi ovid ifomtio byod wht is ildd i th dit tig fo ditig dowgds. Go ttibts th ditio of tig dowgds to iss sig thi xt ifomtio to fily i is fo th iski isss. Rtig gds ot ditd bs iss hg isss thy kow to b btt qlity th thi bli tig, th vg is ost fo thi bli tig istd of hgig thm th tilly fi i. Li s fidigs b osistt with Thko s modl wh istd of isss hoosig how mh is to by thy di titd o th mim thy hgd to by fll is. Th slts sggst tht iss iig i th tl isk fo miilitis tht iski th th sttd tig d iss hg btt td miilitis th vg mim bsd o thi tig bt this wold ot lv y bfit fo th low ty d wold b ostly fo th high ty. I sggst modl tht wold ot fo th mims big st otly odig to tl isk bt still ovidig bfit to th miility thogh th id bfit of liqidity. Th miilitis tht ot oly td might hv mo ostly tim ovidig ifomtio whih is why thy wt to is i th fist l. Li fids isd bods mo likly to xi tig hgs bt this old b bs tig gis mo sily gt ifomtio o ths miilitis so th tigs mi t. Li dos domt is mim of.1 to.1 bsis oits fo td miil bods bsd o thi dlyig tig fom lifoi dig 1-5. Ths mims ovid sot tht is ovids t bfit to miilitis bs th mims lss th th bs yild bfit of is. Piisky d Wg (11) look t th t of tx idd litl o miil bod yilds. Thy g th di i txs btw stts sgmts th miil bod mkt d ots fo my of th miil bod mkt zzls. D to di s i stt txs iss bility to divsify oss gios llows thm to gt sls tht thy sh with th miilitis. Emiil fidigs distigish thi stoy fom Nd d Sigh (4) tx bitg modl. Thy s

19 1 logit gssio to omt th liklihood of is otollig fo mtity, tx t, tx stts of th stt, iom it, ivstmt it, llbility, tsy bod yild d w dbt iss. Th w dbt iss vibl ovids th o it of itst s it sts th liklihood of gttig is bsd o th tio of miil bod iss dig th y ltiv to th oltio of th miility. Th liklihood of is is isig i dbt iss ltiv to oltio whih gos towds gig thi stoy d mi ov Nd d Sigh. This ovids stoy i li with Piisky d Wg (11) i tht thy look t o st of liqidity th di d to di ig tx bfits. I ovid stoy tht omsss isk tl ivstos d ll sts tht wold di tit th liqidity isk btw two isss v withi th sm stt. Shi, Coh, d Bgstss (1) fid tht dig th isis yilds o isd miil bods is bov yilds o isd bods with th sm dlyig tig. Shi, Coh, d Bgstss (1) stimt th yild bfit of is sig th sm mthodology s vios litt xt tht thy llow fo th ditio of th td wh lookig t yilds. Shi, Coh, d Bgstss (1) ttmts to xli th is i isd yilds ov isd miil bod yilds by lookig t th t of liqidtig td otio bod ogms bt olds th is i isd miil bod yilds ws ot sd by th TOB ogms. oth ossibility is th ossibl t of mtl fds d iss sllig o isd dbt bt thy fid th oosit to b t tht mtl fds tdig to hold isd dbt. Nxt thy osid liqidity by vltig odti tstios ost ms dvlod by G, Hollifild, d Shho (). Th tstios osts fo isd bods is 3 bsis oits mo xsiv th fo isd bods whil io to th iss th ost is 1 bsis oits. Thy xli th 1 bsis oits s htogity i ivstos, my modl sggsts di t xltio. Th tity sodig th viosly isd miilitis is gt d th dl is mo od with ov yig d thfo hgs high tstio osts. I bild o Shi, Coh, d Bgstss (1) by xliig th ivsio i yilds is d to th dlyig di i liqidity btw isd d isd isss. Th dlyig di s xist io to th iss bt xbtd dig th isis. s th is bfit is dd d liqidity os is th is lg ositiv yild di til btw th isd d isd miil bod yilds. This tks w oh to idtifyig th vl of is d th ifomtio otid i hsig is stly. Simil to Qigly d

20 11 Rbifild I s isss who hv isd d isd isss otstdig. I bild o th vios litt by stimtig is bfit tht otols fo sltio ito is. Th t fiil isis llows lysis of th bfit of is s th dit qlity d dibility of th iss is movd. I st siml modl tht sggsts th bfit of is oms fom iss bility to imov th liqidity of bod whil ot hgig th miility fo this bfit d to th omtitiv t of th is mkt. G, Hollifild, d Shho () d His d Piwow () stimt mss of tstio osts tkig dvtg of th SRB dt whih ovids who iititd th td with th dl. Both s fid dl mk o tstio osts isig i is whih G, Hollifild, d Shho () ilds s omlxity ft bt His d Piwow () lyzs ditly. Th slts sggst dowwd bis i th imt of th is bfit sh tht if th w o dl mk th bfit fom is wold b gt. y fidigs ild th dl mk i lltig th di btw isd d isd yilds. 1.4 Hyothss Imgoigtosttthmihyothssthtwillbtstdistio1.. Th fist qstio I xlo looks t th t of is o miil bod yilds. Poositio 1. Th t bfit of is lows yilds o bods. Is ds th isk of miil bod dflt d imovs liqidity bt oly hgs fo th dit hmt so th bfit shold otwigh th ost. Th sod qstio I sk stimts th hg i th yilds of miil bods d to slf sltio t. Th slf sltio sts th liqid ty fom th illiqid ty. Poositio. Withot is th go who wold bfit fom is will hv high yild. If th xists obsvbl di s btw isd d isd miil bods, th th hs of is will st th mkt ito two tys. I hyothsiz tht th illiqid ty hs is bs th iss hg th t fo th vg mkig is did fo th illiqid ty. Thfo si th mkt idtify th illiqid ty th yild o illiqid bods is high. Th di s btw th isd d th isd is wht th mkt is iig.

21 1 Poositio 3. ds i th is s dit qlity iss th yild o th isd bods. If th is s dflt obbility iss, th th liklihood th is ys i dflt vt dss d th is boms wothlss. Poositio 4. is i th liklihood of liqidity disot iss th isd yild. Th obsvbls tht mk miility th illiqid ty i oml tims will b xbtd i tims of iss sig th mkt to t high mim o illiqid miilitis. 1.5 Dt Imgthdi tdtsostottstblmiilboddtbs. Th iil Sitis Rlmkig Bod (SRB) ovids tstiol dt fom to. Stdd d Poos (S&P) ovids tigs d bod htisti dt. dditiol htisti dt oms fom Bloombg. Th SRB tstiol dt otis ov millio tstios o ov, idividl log tm miil bods. I mth th tstios with dt fom S&P. Th S&P dt otis stdd tigs, stdd tig hgs, S&P Udlyig Rtig (SPUR) if vilbl, SPUR hgs, d bod htistis fom 1 to. SPUR sts th tig of bod withot dit hmt. If dit hmt dos ot xist fo th bod, th th SPUR tig will ot xist. Howv, bods withot SPUR my hv dit hmt. Fo h tstio Imththbod smostttigiotothtstiodt. Sohbodhs th most to dt dlyig tig t th tim of th tstio. I slmt h tstio with Bloombg dt ildig llbility, mtity, o ig ty, oo, iss siz, bod siz, d stt i od to otol fo bod htistis. ll dt sts mthd by si. I th mgd dt I stit myslf to bods tht log tm, o-llbl, gl obligtio, tx xmt d hv (-,, +) dlyig tig. mog th isd tstios I fos o thos tds tht isd by BC, BI, FS, o ssd. Th SRB dt ods who iititd th tstio. I s tstios wh ivsto is byig miil bod fom dl. Fo this stdy I tt dlyig tig of -, d + s dlyig tig of.

22 13 gig th fo sos yilds dt st tht ovs ll dily miil bod sody tstios fom to. Th to iod hs th dvtg of ovig th tim iod bfo, dig, d ft th dowgd of th iss. Th iq miilitis i th sml, s dfid by th fist six digits of th si. Th 31 mixd isss whos bods tdd ov th - tim iod. Ths bods omis,3 of th tstios o 4% of th sml. Th mb of homogos miilitis is 531 mkig th miig 3% o 4,44 tstios. Fth smmy sttistis b fod i Tbl 4.3 d 4.. Dfiitios of ll th vibls sd i Tbl 4.1. Shi, Coh, d Bgstss (1) s sml simil to th o i this xt thy ild mo ys of SRB dt d s gt to dd htistis whil this ss Bloombg d S&P. 1. thodology I this stio I ovid w idtifitio sttgy fo stig th vl of is fom th vl of slf sltio. I xmi th bis i th st stimts of is vl d xli sttgy to otol fo iss ts i od to t bisd stimt of is vl. Th lst t of this stio domts how th vl fo sltio ito is is stimtd Th Bisd Vl of Is Shi, Coh, d Bgstss (1) domt tht dig d ft th olls of th miil bod iss isd yilds os bov th isd yilds fo th fist tim. I ofim this fidig by lookig t th di btw isd d isd yilds whil otollig fo dlyig tig d bod htistis. I th followig gssio 1 ovids stimt of th vl of is Sd i,j,,t = 1,t Isd i + k,t X i,k + s,t s + i,j,,t, (1.1) wh Sd i,j,,t sts th sd to tsy fo miil bod i, issd by iss j with tig i tim iod t, s is st of stt otols, X i,k is vto of k stdd otols sd to stimt miil bod sds to Tsy fo bod i, sh s mtity, bod siz, iss siz, d tim otstdig. Th fll list of otol vibls sd b fod i Tbl 4.1. Th lot of 1 stimts b fod i Fig 4.1. I lso sod sifitio to otol fo ss lvl dt bot

23 14 iss fiil htistis: Sd i,j,,t = 1,t Isd + k,t X i,k + s,t s +,t + i,j,,t, (1.) wh Sd i,j,,t is th di btw tsy yild d yild o miil bod i, issd by iss j with tig i tim iod t, P is st of ss otols, d S d X i,k th sm s i gssio 1.1. Th slts of this gssio do ot vy gtly fom gssio 1.1. Rgssio 1.1, withot ss otols, is ommo i th st litt fo stimtig th vl of is. Th oblm with gssio 1.1 is its stimt 1 is bisd dowwd d to th lk of otol fo iss ts. Howv, th di lty i stimtig th is bfit lis i tig idtifitio sttgy tht ots fo th ossibility tht obsvbl htistis oltd with who hss th is. OLS i th vios gssio is th t, whih is th t vl of is, ls th o-zo omlizd ovi btw big isd d vios obsvd htistis. Nmly, ˆOLS = + ov(isd j, j ).Th v(isd j ) obsvbl iss htisti j ts th disio of iss j to is. H, th bisd stimt of is otis two omots: is t, whih Issmolyddsothbodstigdthslfsltio t,whihdds o th miility d bod tig. Th id is tht miilitis tht hoos to is di t fom thos miilitis tht hoos ot to is d th is disio is xogos to th tig of th bod. 1.. Th Ubisd Vl of Is I solv th iss of bisd stimt ( ˆOLS) of by fosig o isd d isd bods issd by th sm miility. Stig th is bfit fom th slf sltio t is ossibl bs th miilitis who hv otstdig bods tht both isd d isd. Th t lst two sos why miility my hv both tys of bods otstdig; o os wh miility ds to iss mo dbt th th mkt is willig to bsob, oth o hs if th miility s mktbility hgs. Sos Clifoi wts to iss mo dbt th th mkt wts to by. Howv, th mkt my b willig to by isd dbt istd bs of divsifitio. I tht s Clifoi by is o som of it s dbt d ith is mo dbt o y low yild o th oigil mot of dbt. If, ov tim, miility with isd

24 15 otstdig dbt hs hg i it s mktbility sh tht is is bfiil d ds to iss mo dbt th w dbt will b isd. This vlts th is bfit by stimtig th di btw isd d isd bods of th sm miility with th sm tig whil otollig fo ll oth obsvbls. To void bis, gl obligtio bods sd to otol fo di t ights to sh flows o di t fdig sos. Th followig gssio movs ll obsvbl iss htistis by otollig fo iss fixd ts. Sd i,j,,t = 1,t Isd i + Iss,t Iss + k,t X i,k + s,t s + i,j,,t, (1.3) wh Sd i,j,,t, s, dx i,k s bfo d Iss is fixd t otollig fo th iss sifi ts. I gssio.1 1 ovids th bisd stimt of th is t o miil bod yilds Th Vl of Slf Sltio I this stio I stimt th vl of th slf sltio t. Th ititio bhid stig ot th sltio ito is omot oms fom th vios gssios. Th bisd stimt otis th bfit of is d th sltio ito is t. Sbttig th bisd stimt of th is t fom th bisd stimt of th is t ods stimt of th t of slf sltio. Rgssio.1 stimts th di i yilds btw isd d isd bods holdig ll ls ql. I oth wods th 1 o it of qtio.1 is: 3 1 = IsV l 1 fom gssio 1.1 is th is vl ls sltio ito is vl 1 1 = IsV l + Slf Sltio By sbttig th di s of ths stimts I m lft with stimt of th

25 1 slf sltio t = Slf Sltio Th followig gssio ts th bov ititio. Sd i,j, = 1 Isd i + ll i Isd i + 3 ll i + X i,k + X i,k ll i + i,j, (1.4) wh ll i is idito vibl of whth bod i is issd by homogos miility, Sd i,j,,t sts th sd to tsy fo miil bod i, issd by iss j with tig i moth t., d X i,k is vto of k stdd otols s bfo. ll th gssios fo tig of. Th ot ogh isd GO bod tstios i od to migfl sttistil tsts fo oth tigs Robstss Chk I stio 1.. th stimt of is bfit ws oly o mixd isss whil th slf sltio t ws stimtd sig both mixd d homogos miilitis. To ot fo th ossibl di btw th gos I stimt th imt mixd miility hs o isd bod omd to th imt of homogos miility. Sifilly, I gss: Sd i,j, = 1 ll i + X i,k + X i,k ll i + i,j, (1.5) wh vibls th sm s bov. 1. Rslts I stimt th slts mothly d ov fo di t tim iods. y to d ly to Dmb, st th tim iod bfo d ft th stok is of th miil bod iss dod. y to y d to Dmb st th tim iod bfo d ft S&P dowgdd th miil bod iss. Th tim iod od th stok mkt do is sigifit if ivstos od bot th iskiss of th iss. Th iod ovig th dowgd is of o to miil bod ivstos

26 1 if th ivstos qid to hold sitis bs dowgd wold fo thm to sll thi isd miil bods. I fist xmi th bisd stimt of is vl. Fig 4. sts th vl of is fo th vg is. O vg is is sosibl fo ight bsis oits (bs) ds i yilds ov th - iod. Stig th - tim iod ito th fo iods dsibd bov shows tht is ovids ight bs do i yilds fo ll iods. Th vios stimts of th bfit of is by tim iod b s i tbl 4.5. Whil th slts fo h tim iod sttistilly sigifit I lso fid tht th tim iods ot sigifitly di t fom h oth osistt with ight bs bod yild dtio ov th ti tim iod. Lookig t th bfit of is o mothly bsis ovids mo dtild xltio of how th is bfit hgs ov tim. Is ds yilds by oximtly ight bs fom y to Dmb. Fom y to y th oit stimts of th bfit of is dsig bt th stimts ot sigifitly di t fom zo. ft y th is bfit is sttistilly sigifit d ds yilds by ight bs o vg. t o tim is is sosibl fo sig isd yilds to is bov isd yilds. Th mkt did ot woy bot th lims yig bility of th is s wh th miil bod is s stok is dod, bt wh th tig of th iss dod th mkt got od. tig dowgd mt th bility d svis ovidd by th iss w dd. Ivstos bm woid tht losss wold ot b ovd if iss limd bkty d th liqidity of isd bods ws hgd o th bods w o log td. Th vl of is is omosd of my di t bfits fom moitoig d litl ts to liqidity hmt. Ufottly it is lmost imossibl to distgl th di t bfits ovidd by h t. Bt th slts sggst tht is dd yilds fo isd miil bods dig th ti iod of -. Nxt I bkdow th is bfit by is. I xt tht thos iss, tht mid with high tig, osisttly ovid dtio i yild to isd bods, whil th iss who w svly dowgdd o i bkty ovid smll dtio i yild o o dtio t ll. Fig 4.5 sts th is bfit fo th is FS whih ws dowgdd fom to + d tly mis t +. Dsit th dowgd FS ovids isig yild bfit dig th isis bs of high mkt tity bot th miilitis oomi oditio. s th oth iss fth dowgdd, th is bfit fom

27 FS iss fom two bs to fiv bs. BI d BC who w svly dowgdd dig th isis, BC fild fo ht 11 bkty i 1 d BI is td BBB, st di t stoy of th bfit of is. lyzig figs 4.3 d 4.4 shows tht BC d BI follow simil td bt with di t mgitds. Both iss ovid dtio i bod yilds io to thi stok i do with BC is dig bod yilds by 11 bs d BI is dig bod yilds by two bs. Sttig i Novmb th bfit ovidd by is dlis whih slts i BC ot ovidig is bfit ost tig dowgd whil BI dos ot ovid bfit bgiig i h. Nxt I xmi th t of slf sltio. Fig 4.3 shows th mkt hgd high yilds fo isd bods with dlyig tig omd to isd bods. Tbl 4. ovids vg stimt of 13 bsis oits ov th ti sml. Eith th mkt thiks tht isd bods tlly iski th isd bods, h th is i yild ssoitd with big isd, o th xists oth di btw isd d isd bods tht th mkt is. This slt sots liqidity stoy t foth i this ov th lssi siglig stoy fo whih th oosit slt is xtd. Th slf sltio t b ittd s th di i yilds btw isd bod d isd bod if th isd bod did ot hv is. Pio to th do i stok is of miil bod iss th isd miil bod wold td t six bsis oits high th isd bod if th isd bod did ot hv is bt ft th stok i do th di iss to 1 bs. Bfo th dowgd of th iss th is six bs is i yilds btw isd d isd miil bods, whs ft th isis th di btw bods is ow bs. Chtistis tht s miility to hs is htistis tht s th miility to b iski o lss liqid dig isis. Wh lookig t th sltio ito is vl by is th sm tt s i th vl of is s. ll th iss hv isig t o th yild of isd bods. Howv, th vl of slf sltio ito FS is stys los to zo i fig 4. d dig th iss fltts od ight bs omd with BC wh th vl stts o isig by 1 bs yilds d otis to is yilds by bs ft th dowgds i fig 4.. Pttig th vl of is d th vl of sltio ito is togth I fid tht th s of th vsl i yilds btw isd d isd miil 1

28 1 bods is ot d to th is bfit bt sltio ito is. omiso 1 of tbl 4.4 d 4.5 shows tht 1 is gt th 1,tho 3 itothisd dmmy fo th bis gssio is lg th th o it o th isd dmmy otollig fo fixd ts of th iss. Th vsl of yilds is ot fltio of is bt fltio of th di i dlyig htistis btw isd d isd miil bods. Whil tht di iss i tims of tity, th di is lwys th d it is oly with th movl of dit hmt tht th di b s i th yilds. Dig th tim of th dt sml BC limd bkty bt th ot hd ot filizd th bkty l. Th slt ws tht v i bkty BC ws qid to y ot 1 t o y lims. I itt th ft tht th is ws still tthd to th bod to m tht th mi bfit of is oms fom th iss bility to gd th bod s tig to. If th bfit ws d to dit hmt is wold ovid bfit v ft th is s dowgd. O ossibility fo th xist of th slf sltio t is th itisi di btw miilitis tht mixd vss homogos. I tst fo xistig di s d fid tht fo isd bods th is o di i sds ttibtbl to th ty of miility. This is i gmt with th liqidity modl bs y bod withot is dos ot hv liqidity oblms so th yilds shold ot b bsd o th iss. lso, th o di s i sds btw isd bods of homogos d mixd isss. Th slt tht bods of mixd isss d homogos isss simil show i tbls 4.13 d 4.14 sot th fidig tht th slf sltio t is slt of di btw isss who hoos is d thos tht do ot hs is. Usig th S&P dt vilbl fom 1- I look t th liklihood of is fo ti bod htistis ildig ss dt ltd to th oditio of th issig miility. Th slts simil to th litt i tht gl obligtio bods, d high td bods lss likly to gt is whil lg d log mtity bods mo likly to gt is. Th w ss dt sggsts tht sh mss of fiil stgth s dbt otstdig, dbt issd, itst o dbt, wgs d oty tx o it bsis do ot t th disio to is. Th dt shows tht s xtd is ovids ositiv bfit thogh th isis. Bt th sltio vl iss yilds so th isd go hs high yild withot is th th isd go. Th stdd siglig modl of Thko (1) sggsts th high dit qlity tys wold hs is to sigl thi

29 qlity, bt th dt shows th miilitis tht hoos to by is wold hv hd high yilds if thy did ot by is th isd bods, ot to th siglig ditios. y liqidity stoy is i li with th t litt d miil fidigs i Nd d Sigh (4). I th ltt miil wok th thos fid tht th liklihood of is is isig i mtity, log of mkt vl d dsig i high bod tigs. Thy fid tht low td d td bods lss likly to b isd d to th ft tht th osts to iss th lgst fo td miilitis d thfo iss do ot slly o is to td o blow ivstmt gd td miilitis. Th fidigs i this g with th slts i Nd d Sigh s th log th mtity of th bod th mo ivstos od with liqidity, h lg liqidity bfit s to log mtity bods. Th high liklihood of is fo lg mkt vl isss is xlid by th ft tht s th mkt boms sttd with bods fom o iss, it boms hd to sll d fid ivstos fo ths bods, so sh miilitis hv lg liqidity mim, h th vl of is gos. Piisky d Wg (11) fid tht th high th dbt iss dig y ltiv to oltio, th mo likly miility is to gt is whih oiids with th liqidity stoy. This is lso osistt with Go, Shs, d Tzik (4) who disov tht giv th hoi btw ifomtio dislos d is miilitis hoos is bs dislos is ostly fo fims with lg dislos osts. Is will b bfit to th miilitis with high mktbility osts. I fid tht omtitivly o d bods mo likly to gt is whih gs with th liqidity stoy bs omtitiv o igs h fst wh s gotitd o igs giv th dwit tim to mkt th iss mkig th liqidity mim gligibl. This liqidity itttio omlmts Shi, Coh, d Bgstss (1) by xliig th yild vsl thy domt. Th stio of bfits is bl to xli why isd bod yild is bov isd bod yild bs v thogh th dlyig dit qlity ws otolld fo, ot ll th dlyig di s w otd fo sh s th di i tl liqidity of th two gos. This modl wold lso xli why mtl fds d ivstmt omis who ot fod to liqidt lik th td otio bod ogms wold hold o to th isd bods bs thy od bot th i imt of sllig isd bod, tht is th liqidity mim ssoitd with ths bods hs isd. Shi, Coh, d Bgstss (1) fids tht isd bod dlyig tigs gdd mo th isd bod tigs. I do ot thik this slt is

30 1 sisig giv th otol d ovts t o isd isss by iss. I wold g isd bods ot wos qlity th isd bods bt isd bods tly td d isd bods hv togh tim ommitig ifomtio to th mkt. Whih is why thi oigil tigs low th dsvd. Si th is kows th bods thy isig btt th th mkt thiks this is fltd i mim is. Th iig of th t isk of miilitis is otd i by Li (11) tht fids th iss hg th miility thy kow to b btt qlity th ost fo thi bli tig, whil thy hg th miilitis kow to b low qlity high mims i li with thi low qlity. So miilitis ot gttig bfit bsd o thi dit tig bt ths miilitis tht ot ovy thi t qlity to th mkt most likly hv ifomtiol symmtis o mktbility isss tht will llow is to ovid bfit to th miility. Giv th stimts fo th bfit of is t sh smll mgitd of ight bs th qstio iss if is wold ovid bfit ft otig fo is ost. This ddsss this o with stimt fom Li (11) who fid th is mim is btw.1 d.1 bsis oits o vg doll. Whih lvs bfit to isss of 5. to.1 bsis oits. 1. Colsio Th mi otibtio i this is stig th is bfit ovidd by is fom th slf sltio t d ovidig miil stimts of ths two omots. O vg is ds yilds by ight bsis oits d sltio ito is iss yilds by six bsis oits io to th isis. Dig d ft th isis is ds yilds by ight bsis oits bt sltio ito is iss yilds by 1 bs sig th vsl fod i Shi, Coh, d Bgstss (1). I lso otibt lttiv xltio of why miilitis did to hs is. iilitis ly o th itl mkts to k thi itis flot. Dig th isis miil bod iss w dfltig bfo th miilitis thy w isig this md ogss qstio th os of miil bod is. Cogss wts to hl miilitis iv h fiig whih is why thy mk miil bods tx xmt. Thy wt to kow if is ovids bfit o if th bfit big ovidd b odd by h mthod. Fo xml if th bfit of is hs to do with th di t tig sls sd by oody s th

31 ogss will ty to hg th wy tigs ssigd. It is imott fo ogss to kow how iss ovid bfit. This wy Cogss ovid h d it ss to th itl mkts fo miilitis. Elimitig dit tigs s itl qimts d isig ifomtio dislos o mkig ifomtio dislos h wold likly d th s of miil bod is. Rgltos shold tk ito ot wh th is bfit is omig fom i moldig gltios. Th is lot of hg omig i th miil mkt fom th imlmttio of Bsl III to th shift i oody s tigs to globl sl.

32 3 Cht Th E t of Is o Liqidity.1 Itodtio Th t fiil isis sw th olls of my ivstmt bks d is omis. Tdig dsd d sds widd i most dbt d divtiv mkts. Th fiil olls ws i lg t d to th dflts i th sbim mkt, th misiig of otty isk d th misdig of th t oltio btw ssts by th dit tig gis. ll of ths oblms ld to fi sls of ssts i som mkts d th shtdow of oth mkts. Tdig blow mkt vl d lk of tdig tivly liqidity oblms. Liqidity is highly dbtd ot, with my di t dfiitios flotig od. Whil liqidity itslf hs my itttios, th is gl osss bot whih mkts liqid d whih mkts illiqid. Ev dig th bst of tims th miil bod mkt is osidd illiqid. Th miil bod mkt ws td by th fiil isis both ditly thogh dd tx vs d iditly thogh th olls of th miil bod is omis. iil bod is omis, lso kow s mooli gtos, itdd to is oly miil bods. Howv, io to th fiil isis moolis lso sold Cdit Dflt Sws (CDS) d is o otgg-bkd Sitis (BS). Bs th moolis ovidd CDS too hly d hd lg itl losss, thi dit qlity d os i gl i qstio. Th tity bot th moolis vibility ws so gt tht, t th oddig of th Nw Yok is glto, W B t td Bkshi

33 4 Hthwy Is to is miil dbt. With o miig td is (ssd Gty), o BBB+ is (iil Bod Is ss (BI)) d th miig fiv bkt, th qstio iss wht is th ol of is? Wilko (1) miilly xmis th dtio i miil bod yilds ttibtd to miil bod is d sggsts tht o mhism thogh whih is hls d miil bod yilds is by imovig th liqidity of th dlyig miil bod. Th t dds to th miil litt o msig liqidity i illiqid mkts. It miilly xmis th mhism thogh whih is ts liqidity. I tst th di i liqidity btw isd d isd bods d xtd th lysis to ild th imt of th tig dowgds of th miil bod iss o miil bod liqidity. This is ot th fist to xmi bfits of miil bod is, bt is th fist to tst th liqidity di btw isd d isd bods both bfo d ft th fiil isis i systmti m. Itstfothsofliqiditysigthmssommotothoot bod mkt, mly th mihd ms, Roll s bid-sk sd, d tov. I gss h ms o isd dmmy whil otollig fo bod htistis. This llows m to om th liqidity of isd bod to th liqidity of isd bod ov giv tim iod. This xmis ot oly th liqidity of isd bods ltiv to isd bods, bt how th isis ts th liqidity of isd bods. I di -i-di gssio to s how is s t o liqidity hgs ov th isis iod, whil otollig fo th ovll hg i th th miil bod mkt liqidity t th sm tim. Ifidthtthliqidityofisdbodsislowltivtoisdbodswhih sggsts tht th dtio i miil bod yilds d to is is ot d to liqidity bfit s disssd i Wilko (1). Uo omig th liqidity of isd bods bfo th isis to thi liqidity ft th isis, th slts idit tht liqidity dss ft th isis. I ft it is th dowgd of th iss thmslvs tht omts miil bod liqidity to ds. This imlis tht th iss bility to is bod tigs to is how thy w ovidig liqidity ssist. I look t th t of is, holdig ostt th miil bod tig, d fid isd bods mo liqid th isd bods fo vy tig. Dig th - tim iod th slts idit bods w lss liqid th o- bods, s msd by th th mthods dsibd bov. Th t of is o liqidity b lid to mkts with simil h-

34 5 tistis sh s ivt motgg is (PI) d BS. Not tht PI svs idividl isss of motgg dbt, whs th BS mkt hs is i th fom of sitiztio, whih mloys ov-olltliztio d di t th stts to imov th dit of ti ths. By otst, iss-ovidd is is ot ommo i oth dbt mkts sh s th oot dbt mkt. Th is ogizd s follows; Stio.1 ovids itodtio. Stio. xmis bkgod ito th lys d stt of th miil bod mkt, whil stio.3 viws th t litt ddssig dbt is d liqidity mss. Stio.4 sts th dt vilbl. Stio.5 dvlos gmt fo is ovidig liqidity s wll s my mi hyothss. Stio. dissss mthodology fo tstig th hyothss. Stio. smmizs th slts. Filly, stio. olds.. Bkgod I this stio, I disss th ol of miil bod iss d dit tig gis i th miil bod mkt. I dditio, I xmi th ol of gltios tht llow is to t liqidity, s wll s lvt fts of th miil bod mkt tht mk it illiqid omd to oth mkts. iil bod is woks di tly fom is i oth mkts. I th miil bod mkt th miility mks o-tim fot ymt ot of th bod ods to th is, who th ovids is fo th lif of th bod. If th miility dflts, th is sts i d mks th shdld itst d iil ymts, ith til th miility sm ymts, o til th bod xis. I th ss wh th miility is bl to sm ymt, th miility is qid to y bk to th is y missd ymts d lgl fs qid fo gttig thos ymts bk. iil bods, lik oth bods, tyilly iv dit tigs fom Stdd d Poo s (S&P), oody s, d odigly, fom Fith who is th thid lgst miil bod t. S&P d oody s hv b tig miil bods fo ov 1 ys. S&P ws th fist of th dit tig gis (CR) to t miil bods with th high tig, of th is o th miility, fo isd miil bods. Not log ft, oody s lso swithd fom hvig two tigs fo th miil bod, o fo th miil bod d o fo th is, to th high of th two tigs. I th st oody s hd di t tig systms fo oot bods d mi-

35 il bods. oody s hs t ot tsitio tbls tht show tht -td gl obligtio (GO) 1 miil bod is qivlt to -td oot bod. Th two di t tig sls t disot btw iss td o th oot sl d th miilitis who td o th miil sl. This llows miil bod iss to ovid tig to miilitis fo th i of is, ottilly hlig th miil bod liqidity. Cti tys of ivstos, sh s moy mkt mtl fds o is omis tht hold miil bods, mo likly to by -td miil bods. Sh ivstos ith gltd s som moy mkt mtl fds thogh SEC (Sitis d Exhg Commissio) l, o thy hv itl qimts, lik is omis, to hold ssts of high qlity. If iss hs tig, th lg ool of ivstos is vilbl to hs th iss s bods, h isig th bods liqidity. oody s is tly shiftig ll tigs ov to globl sl fo si omiso. S&P lims to hv lwys td ll bods togth o th sm sl. It its th di ig tigs distibtio fo oot bods d miil bods s oof of sig th sm sl. lmost % of miil bods td o btt, omd to oot bods wh lss th 5% td o btt. oth htisti of th miil bod mkt tht otibts to it s illiqidity is tx-xmtio. iil bods xmt fom fdl txs d stt txs if yo sidt of th stt i whih yo boght th miil bod. Bs of th tx xmtio, ivstos i th highst tx bkt will bfit th most fom holdig miil bods. Tyilly ivstos of miil bods i th highst tx bkt d lookig fo sf ivstmt. Bs of th tx xmtio i th miil bod mkt, th mjoity of ivstos idividls. s th Fdl Rsv s Flow of Fds ot shows, ov % of miil bods hld ditly o iditly (thogh mtl fds) by idividls. Is omis lso hold lg t of th miil bod mkt, s do sio fds. Bks, who sd to hold 3%, ow hold los to % d to th 1 tx hgs, whih md it mo ostly to hold miil bods. Th omositio of ivstos xbts th illiqidity iss bs idividl ivsto i this mkt holds oto miil bods, ldig to fw tds th i oth mkts. This is vidt i my sml, i whih th vg bod tds i tims y. By otst, th vg stok tily tds mo th i tims y. Th ov 5, miilitis i th Uitd Stts, d h miility is 1 Gl obligtio bods ovid fo th fll fith d dit of th issig miility.

36 ottilissofmiilbods.lgvolmofisssmksitdi ltfo ivstos to tk th tim to l bot ll th di t isss. This iss sh osts, ldig to lss liqid mkt. oth iss otibtig to th illiqidity i th miil bod mkt is th vilbility of ifomtio. Bs miilitis ot gltd s losly s fims otig ifomtio, ifomtio o miil iss b ov y old d di lt to obti fo ivsto..3 Litt Rviw I sit of th ss litt o liqidity stimtio i th miil bod mkt, litt xists o thois whih xli th bfits of miil bod is. y thois sggst is mks miil bods mo tttiv whih my ditly o iditly t liqidity. Th hls thogh whih dbt is t liqidity, ild siglig, ifomtio dislos, tx-bsd tiol, d litl ts..3.1 Siglig Thko (1) sts o of th fist thotil xltios fo dbt is. His thid ty siglig modl lis to y mkt i whih thid tis gth ifomtio to llvit lmos oblm. Howv, i od to look t qilibim h foss o dbt is, sig th stdd lmos mkt with symmti ifomtio wh isss kow thi ty bt th ivstos do ot. I th modl, thid ty ys f to l th ty of th iss d th ss tht ifomtio to sll thm is. Th mot of is boght by th iss is isig i th qlity of th iss d th mim hgd is dsig i th qlity of th iss. H fids stig qilibim whby th highst qlity isss by th most is, d o-stig qilibim i whih ll isss flly isd d th mkt itst t is th isk f t. Th isss sigl thi qlity thogh th hs of is. Thko mks f to th ft tht th ty of is h is disssig is ol i th miil bod idsty. His modl sts o th ssmtio tht isss did how mh is to by. Howv, i lity miil bod is is ll o othig disio d th highst qlity isss do ot by is. Nothlss, Thko s modl ovids mhism whby isss might by is fo th siglig bfit gdlss of y is bfit. Th

37 my istittiol ivstos i th miil bod mkt who mst hold ti qlity sst. Thko s modl sggsts tht isss who hs is shold b mo liqid th thy wold b othwis bs th isss will hv lg ivsto ool th withot is..3. Ifomtio Dislos I th t litt o miil bod is, Go, Shs, d Tzik (4) fid vid tht is is lso tool fo ovidig ifomtio. Thy om ihig with Psylvi d fid i Psylvi, wh gltios lss stigt, miilitis td to gmt limitd dislos with is. I otst, ihig isss, with tight dislos lws, s lss is. Dowig d Zhg (4) oit ot th miil mkt is lss tst th th qitis o fts mkts, si miilitis ot sbjt to th sm disloss s blily tdd ootios. Whil thy xmi th volm-voltility ltioshi i th miil mkt, lss tsy my lso motivt iss to gth ifomtio. Rt fidigs vl tht mb of stts hv lg fdd sio libilitis d to di t otig mthods. Novy-x d Rh (11) ovid vid tht ths fdd sio libilitis is th ost of boowig fo stts. Pio to th w otig mthod by whih stts will hv to domt ths libilitis, th siz of ths libilitis hs b l, lvig ivstos ti bot th qlity of th iss. O so ivstos lik miil bods with is is tht iss bl to s thi xtis d hv dstdig of wh th libilitis xist. log th sm lis, Potb d Rb (1) disss th di i fisl ostits btw stts. Ifomtio tht my b hd fo ivstos to xmi wold llow fo oomis of sl d lv bfit to iss. By mitigtig som of ths ifomtio symmtis, is is bl to d sh osts. Withot is th dwit might hv to fom mo i-dth lysis of th iss i od to fid willig ivstos. If is ds sh osts, th I shold fid tht is imovs liqidity si low sh osts tslt ito lg dmd o lss distotiv is..3.3 Clitl E ts Diso (1) xmis mkt sgmttio thoy s th so fo miil bod is. H xmis th t of xss dmd fo low isk bods