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Money and liquidity in financial markets

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Author Info

  • Nyborg, Kjell G.
  • Östberg, Per

Abstract

We argue that there is a connection between the interbank market for liquidity and the broader financial markets, which has its basis in demand for liquidity by banks. Tightness in the market for liquidity leads banks to engage in what we term “liquidity pull-back,” which involves selling financial assets either by banks directly or by levered investors. Empirical tests on the stock market are supportive. Tighter interbank markets are associated with relatively more volume in more liquid stocks; selling pressure, especially in more liquid stocks; and transitory negative returns. We control for market-wide uncertainty and in the process also contribute to the literature on portfolio rebalancing. Our general point is that money matters in financial markets.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 112 (2014)
Issue (Month): 1 ()
Pages: 30-52

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Handle: RePEc:eee:jfinec:v:112:y:2014:i:1:p:30-52

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Web page: http://www.elsevier.com/locate/inca/505576

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Keywords: Money; Liquidity pull-back; Stock returns; Volume; Order imbalance;

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Cited by:
  1. Fecht, Falko & Nyborg, Kjell G. & Rocholl, Jörg, 2011. "The price of liquidity: the effects of market conditions and bank characteristics," Working Paper Series 1376, European Central Bank.
  2. Falko FECHT & Kjell G. NYBORG & Jörg ROCHOLL, 2010. "The Price of Liquidity: Bank Characteristics and Market Conditions," Swiss Finance Institute Research Paper Series 10-20, Swiss Finance Institute.
  3. Imbierowicz, Björn & Rauch, Christian, 2014. "The relationship between liquidity risk and credit risk in banks," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 242-256.
  4. Schuster, Philipp & Uhrig-Homburg, Marliese, 2012. "The term structure of bond market liquidity conditional on the economic environment: An analysis of government guaranteed bonds," Working Paper Series in Economics 45, Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering.
  5. Chris Florackis & Alexandros Kontonikas & Alexandros Kostakis, 2010. "Transmission of macro-liquidity shocks to liquidity-sorted stock portfolios’ returns: The role of the financial crisis," Working Papers 2011_22, Business School - Economics, University of Glasgow, revised Apr 2011.
  6. Chris Florackis & Alexandros Kontonikas & Alexandros Kostakis‌, . "Stock market liquidity and macro-liquidity shocks: Evidence from the 2007-2009 financial crisis," Working Papers 2013_13, Business School - Economics, University of Glasgow.

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