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

See all articles by Prachi Deuskar

Prachi Deuskar

Indian School of Business

Timothy C. Johnson

University of Illinois at Urbana-Champaign

Date Written: June 22, 2020

Abstract

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

Deuskar, Prachi and Johnson, Timothy C., Funding Liquidity and Market Liquidity in Government Bonds (June 22, 2020). NSE - NYU Stern Initiative Working Paper Series, Available at SSRN: https://ssrn.com/abstract=2740993 or http://dx.doi.org/10.2139/ssrn.2740993

Prachi Deuskar (Contact Author)

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

Timothy C. Johnson

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

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