VGSF - WU Vienna - LC

Peter Koudijs, Stanford Graduate School of Business

online via Microsoft Teams Live Events 11:00 - 12:15

Organizer VGSF

As part of the ser­ies of the "Fin­ance Re­search Sem­inar", VGSF wel­comes Peter Koud­ijs from Stan­ford Gradu­ate School of Busi­ness to present his re­search pa­per.
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In­di­vidual skill and mar­ket li­quid­ity: Evid­ence from the re­moval of Jew­ish mar­ket makers in WWII

The re­moval of Jew­ish mar­ket makers from the Dutch stock ex­change on May 1, 1941 sig­ni­fic­antly re­duced mar­ket li­quid­ity. In a dif­fer­ence-in-dif­fer­ence frame­work, we find that trad­ing fre­quency dropped and price im­pact in­creased. We in­ter­pret this as evid­ence that in­di­vidual skill was crit­ical in re­du­cing ad­verse se­lec­tion: ef­fects are lim­ited to se­cur­it­ies with a single mar­ket maker, for which the Jew­ish ban im­plied a com­plete loss of spe­cial­ized skill, and are strongest for se­cur­it­ies most sens­it­ive to ad­verse se­lec­tion. Li­quid­ity was restored after a period of ap­prox­im­ately five weeks, sug­gest­ing it took sub­stan­tial time for other mar­ket makers to ac­quire se­cur­ity-spe­cific ex­pert­ise, even though they had prior ex­per­i­ence with other se­cur­it­ies. Over the same period, all types of se­cur­it­ies (in­clud­ing those with mul­tiple mar­ket makers) saw an in­crease in re­turn re­versals, sug­gest­ing a gen­eral de­cline in mar­ket makers’ risk bear­ing ca­pa­city.

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