Funding Liquidity and Equity Liquidity in the Subprime Crisis Period: Evidence from the Financial ETFs Market

Abstract:     
Using financial ETFs from various financial industries, we set out in this study to explore the relationship between funding liquidity and equity liquidity. We measure funding liquidity from the interbank as well as the collateral markets and examine how funding liquidity affects bid-ask spread, market depth, and net buying volume during the subprime crisis period. Our results show that a higher degree of funding illiquidity leads to an increase in bid-ask spread and a decrease in market depth and net buying volume, indicating that equity liquidity tends to decrease. However, we find evidence of an adverse relationship between net buying volume and funding liquidity for the global ETFs. Based on the event study, we find that there is a significant net buying volume during the Bear Stearns event, but funding illiquidity decreases equity liquidity more significantly following the bankruptcy of Lehman Brothers. Overall, our study provides a better understanding of the role of the liquidity-supplier funding constraint during the subprime crisis period.

Number of Pages in PDF File: 38

Keywords: Equity Liquidity, Funding Liquidity, Collateral Market, Interbank Market, Subprime Crisis

JEL Classification: G00, G01, G12

working papers series