Funding Liquidity and Market Liquidity in Government Bonds
NSE - NYU Stern Initiative Working Paper Series
71 Pages Posted: 7 Mar 2016 Last revised: 22 Jun 2020
Date Written: June 22, 2020
Using a comprehensive dataset of orders and trades in the Indian government bond market, this study presents new evidence on the effect of funding liquidity on market liquidity. Consistent with models that stress intermediary capital, we find that market liquidity has a strong, positive association with borrowing by the primary dealers. However, we find little evidence in support of the conventional wisdom that loose monetary policy boosts market liquidity. The results imply that ensuring the funding of intermediaries is more important than the broader conduct of monetary policy for maintaining bond market liquidity.
Keywords: government bonds, market liquidity, funding liquidity, intermediary capital
JEL Classification: E51, G12, G23
Suggested Citation: Suggested Citation