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.
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.