The impact of MiFID II/R on market liquidity : a quantitative analysis of secondary corporate bond markets

Abstract

In this thesis, we investigate effects on market liquidity in the secondary corporate bond market in Norway, following MiFID II/R. To measure market liquidity, we use Roll’s approximation to bid-ask spreads, Amihud’s illiquidity estimator, the market efficiency coefficient, and trading volume. We use difference-in-differences estimation to obtain the average effect of the directive on corporate bonds subject to the directive over a six-month period and a two-year period after the implementation of the directive. In the six month period, we find a decrease in trading volumes of 11,8 per cent, significant at the 95 per cent confidence level, and an increase in bid-ask spreads of 8,56 per cent, significant at the 90 per cent confidence level. In the long term, none of these effects persist. We do, however, find a decrease in the market efficient coefficient of 8,4 per cent, significant at the 95 per cent confidence level, and a decrease of 19,4 per cent in Amihud’s liquidity estimator, also significant at the 95 per cent confidence level. Regarding the total liquidity effects, these results are inconclusive.