Liquidity and Financial Market Stability

National Bank of Belgium Working Paper No. 55

19 Pages Posted: 14 Oct 2010

See all articles by Maureen O'Hara

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: May 18, 2004

Abstract

Liquidity occupies a central importance for many areas of finance. But there are very disparate views of liquidity, and correspondingly many different policy implications attached to these views. In this paper, I consider the many faces of liquidity and their implications for financial market stability. In particular, I focus on the traditional economics view of liquidity as destabilizing and the more positive microstructure view of liquidity as a positive attribute for both traders and markets. I outline the various policy prescriptions for market stability that arise from these disparate views, and how they relate to current market developments. I then consider a new view of liquidity deriving from the new research on uncertainty aversion, and I detail what this approach implies for market stability. I conclude by summarizing the implications for public policy and central bank behavior toward liquidity.

Suggested Citation

O'Hara, Maureen, Liquidity and Financial Market Stability (May 18, 2004). National Bank of Belgium Working Paper No. 55. Available at SSRN: https://ssrn.com/abstract=1691574 or http://dx.doi.org/10.2139/ssrn.1691574

Maureen O'Hara (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)

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