The Unintended Impact of the Volcker Rule on Primary Market Bond Pricing: Evidence from the Rule 144A Bond Market

Abstract

We study how the Volcker rule affects bond pricing in the primary market. Following implementation, Volcker-affected bonds have greater credit spreads at issuance than non-affected bonds. Bond liquidity in the year after issuance is also negatively affected by the Volcker rule. These effects are concentrated in the Rule 144A bond market. The Volcker rule’s impacts on credit spreads and liquidity are stronger for bonds with lower expected liquidity. The results suggest that expected liquidity deterioration due to the Volcker rule increases the liquidity premium demanded by primary market investors.