Market Liquidity and Funding Liquidity: An Empirical Investigation

HKIMR Working Paper No.15/2010

24 Pages Posted: 30 Jun 2010

See all articles by Giorgio Valente

Giorgio Valente

Hong Kong Institute for Monetary and Financial Research (HKIMR)

Date Written: June 29, 2010

Abstract

We provide empirical evidence that the relationship between market and funding liquidity display significant nonlinearities, consistent with theories of market trading with financially-constrained agents. Using data for the US equity market, we uncover nonlinearities that are consistent with a model with two extreme regimes: a lower regime characterized by the absence of correlation between market liquidity and funding liquidity, and an upper regime where the two variables are statistically positively correlated. Over the sample period the two variables are uncorrelated most of the time, since shocks to funding liquidity are economically small. This situation persists until agents are forced towards their capital constraints and shocks to funding liquidity becomes economically important.

Suggested Citation

Valente, Giorgio, Market Liquidity and Funding Liquidity: An Empirical Investigation (June 29, 2010). HKIMR Working Paper No.15/2010. Available at SSRN: https://ssrn.com/abstract=1632059 or http://dx.doi.org/10.2139/ssrn.1632059

Giorgio Valente (Contact Author)

Hong Kong Institute for Monetary and Financial Research (HKIMR) ( email )

One Pacific Place, 10th Floor
88 Queensway
Hong Kong
China

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