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

38 Pages Posted: 21 Aug 2010

See all articles by Junmao Chiu

Junmao Chiu

National Chiao-Tung University

Huimin Chung

National Chiao-Tung University - Graduate Institute of Finance

Keng-Yu Ho

National Taiwan University - Department of Finance

Date Written: August 21, 2010

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.

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

JEL Classification: G00, G01, G12

Suggested Citation

Chiu, Junmao and Chung, Huimin and Ho, Keng-Yu, Funding Liquidity and Equity Liquidity in the Subprime Crisis Period: Evidence from the Financial ETFs Market (August 21, 2010). 23rd Australasian Finance and Banking Conference 2010 Paper, Available at SSRN: https://ssrn.com/abstract=1662844 or http://dx.doi.org/10.2139/ssrn.1662844

Junmao Chiu

National Chiao-Tung University ( email )

1001 University Road
East District
Hsinchu, 300
Taiwan

Huimin Chung

National Chiao-Tung University - Graduate Institute of Finance ( email )

Hsinchu 300
Taiwan

Keng-Yu Ho (Contact Author)

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

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