Browse by author
Lookup NU author(s):
This is the final published version of a working paper that has been published in its final definitive form by Hong Kong Institute for Monetary Research, 2018.
For re-use rights please refer to the publisher's terms and conditions.
Theoretical studies show that shocks to funding constraints should affect and be affected by market liquidity. However, little is known about the empirical magnitude of such responses because of the intrinsic endogeneity of liquidity shocks. This paper adopts an identification technique based on the heteroskedasticity of liquidity proxies to infer the reaction of one measure to shocks affecting the other. Using data for the European Treasury bond market, we find evidence that funding liquidity shocks affect bond market liquidity and of a weaker simultaneous feedback effect of market liquidity on funding liquidity. We also investigate the determinants of the magnitude of these effects in the cross-section of bonds characterized by different durations and default risk. We find that the market-to-funding liquidity effect is stronger for short-term bonds and for bonds used as collaterals in repo transactions, such as German bonds.
Author(s): Moinas S, Nguyen M, Valente G
Publication type: Working Paper
Publication status: Published
Journal: Hong Kong Institute for Monetary Research Working Paper
Type of Article: Finance
Publisher: Hong Kong Institute for Monetary Research