scispace - formally typeset
Open AccessPosted Content

Market liquidity and funding liquidity

Reads0
Chats0
TLDR
In this article, the authors provide a model that links an asset's market liquidity and traders' funding liquidity, i.e., the ease with which they can obtain funding, to explain the empirically documented features that market liquidity can suddenly dry up, has commonality across securities, is related to volatility, is subject to flight to quality, and comoves with the market.
Abstract
We provide a model that links an asset's market liquidity - i.e., the ease with which it is traded - and traders' funding liquidity - i.e., the ease with which they can obtain funding. Traders provide market liquidity, and their ability to do so depends on their availability of funding. Conversely, traders' funding, i.e., their capital and the margins they are charged, depend on the assets' market liquidity. We show that, under certain conditions, margins are destabilizing and market liquidity and funding liquidity are mutually reinforcing, leading to liquidity spirals. The model explains the empirically documented features that market liquidity (i) can suddenly dry up, (ii) has commonality across securities, (iii) is related to volatility, (iv) is subject to “flight to quality¶, and (v) comoves with the market, and it provides new testable predictions. Keywords: Liquidity Risk Management, Liquidity, Liquidation, Systemic Risk, Leverage, Margins, Haircuts, Value-at-Risk, Counterparty Credit Risk

read more

Citations
More filters

Impact-adjusted valuation and the criticalty of leverage

TL;DR: In this article, the authors propose an alternative accounting procedure based on the estimated market impact of liquidation that removes the illusion of profit, which should curb the leverage cycle and contribute to an enhanced stability of financial markets.
Journal ArticleDOI

On the self-fulfilling prophecy of changes in sovereign ratings☆

TL;DR: The authors empirically investigate the dynamic interactions between sovereign ratings and the macroeconomic environment using a Panel VAR on annual data for European countries from 1996 to 2013 and provide evidence for a significant two-way interaction between the macro economic environment and changes in sovereigns' ratings.
ReportDOI

Arbitrage Capital of Global Banks

TL;DR: In this article, the role of unsecured, short-term wholesale funding for global banks has changed significantly in the post-financial-crisis regulatory environment, and the response of global banks to a large negative wholesale funding shock as a result of the U.S. money market mutual fund reform implemented in 2016 is examined.
Journal ArticleDOI

Macroprudential policy: what can it achieve?

TL;DR: The authors examines both the objectives and the available instruments for new macro-prudential policy making bodies and argues that the objective of financial stability is best understood as avoiding widespread disruption of financial flows.
Journal ArticleDOI

Financial innovation and the performance of small and medium scale enterprises in Nigeria

TL;DR: The liberalization of the Nigerian financial sector inevitably resulted in the phenomenon of financial innovation while studies exist that investigate the effect of financial innovations on economic growth in Nigeria as discussed by the authors, and they have shown that financial innovation can affect economic growth.
References
More filters
Posted ContentDOI

Credit Rationing in Markets with Imperfect Information.

TL;DR: In this paper, a model is developed to provide the first theoretical justification for true credit rationing in a loan market, where the amount of the loan and amount of collateral demanded affect the behavior and distribution of borrowers, and interest rates serve as screening devices for evaluating risk.
Journal ArticleDOI

Continuous Auctions and Insider Trading

Albert S. Kyle
- 01 Nov 1985 - 
Journal ArticleDOI

Bank Runs, Deposit Insurance, and Liquidity

TL;DR: The authors showed that bank deposit contracts can provide allocations superior to those of exchange markets, offering an explanation of how banks subject to runs can attract deposits, and showed that there are circumstances when government provision of deposit insurance can produce superior contracts.
Book

The econometrics of financial markets

TL;DR: In this paper, Campbell, Lo, and MacKinlay present an attempt by three well-known and well-respected scholars to fill an acknowledged void in the empirical finance literature, a text covering the burgeoning field of empirical finance.
Journal ArticleDOI

Bid, ask and transaction prices in a specialist market with heterogeneously informed traders

TL;DR: The presence of traders with superior information leads to a positive bid-ask spread even when the specialist is risk-neutral and makes zero expected profits as discussed by the authors, and the expectation of the average spread squared times volume is bounded by a number that is independent of insider activity.
Related Papers (5)
Trending Questions (1)
What is the deification of the availability of market support and funding?

Market liquidity and funding liquidity are interdependent in a model where traders' ability to provide market support relies on their access to funding, creating potential liquidity spirals.