IDEAS home Printed from https://ideas.repec.org/a/bfr/fisrev/2008119.html
   My bibliography  Save this article

Liquidity in global markets

Author

Listed:
  • Caruana, J.
  • Kodres, L.

Abstract

The latest episode of turbulence has been marked by an extended period of illiquidity in a large number of markets –ranging from traditionally highly liquid interbank money markets to the less-liquid structured credit markets. The event began with what was widely perceived as a credit deterioration in the US subprime mortgage market. However, this quickly raised uncertainty about the valuation of securities related to this market, thus affecting their liquidity. The rapidity with which this market illiquidity has been transmitted into funding illiquidity has been both striking and unprecedented. The event has raised questions about how market liquidity in a variety of instruments is determined in both primary and secondary markets and how mechanisms act to transmit illiquidity across markets during a period of stress. The article seeks to identify how standard concepts of liquidity can be applied to various types of markets across the globe with a view to interpreting how liquidity deteriorated so quickly. Several attributes of liquidity –types of market structures (including existence of formal intermediaries and trading venues), the construction of the instruments, and the types of investors– are used to guide the analysis. One feature that appears to be important for liquidity is the degree to which information about the risks underlying the financial instrument are well understood by both buyers and sellers. Another insight is that the expectations of market participants about liquidity and their ability to monitor it also have an impact on liquidity itself. These attributes suggest that the growth in securitization and complex structured credit products –new developments in the transfer of credit risk– may carry with them a predilection to adverse liquidity events that will require further examination. In light of the analysis, the article identifies ways of mitigating some of the problems that arose in this latest bout of illiquidity. Because liquidity is created and maintained by the market participants themselves, most of the room for improvement rests with the private sector. It is already clear that some market practices and policies will need to change and in this context some suggestions for enhancements to financial institutions’ liquidity risk management are outlined. However, given that both market and funding liquidity are intimately related to financial stability, a public good, there is also a potential role for the public sector. Hence, the tools used by central banks to maintain their role in effi cient monetary policy transmission together with financial stability will need to be reviewed.

Suggested Citation

  • Caruana, J. & Kodres, L., 2008. "Liquidity in global markets," Financial Stability Review, Banque de France, issue 11, pages 65-74, February.
  • Handle: RePEc:bfr:fisrev:2008:11:9
    as

    Download full text from publisher

    File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/financial-stability-review-11_2008-02.pdf
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mikhail V. Oet & John M. Dooley & Stephen J. Ong, 2015. "The Financial Stress Index: Identification of Systemic Risk Conditions," Risks, MDPI, Open Access Journal, vol. 3(3), pages 1-25, September.
    2. Carl A. Crittenden II & William F. Crittenden, 2014. "The Accounting Profession’S Role In Corporate Governance In Frontier Markets: A Research Agenda," Organizations and Markets in Emerging Economies, Faculty of Economics, Vilnius University, vol. 5(2).
    3. Nikolaou, Kleopatra, 2009. "Liquidity (risk) concepts: definitions and interactions," Working Paper Series 1008, European Central Bank.
    4. Woon Sau Leung & Nicholas Taylor, 2013. "Testing for contagion: the impact of US structured markets on international financial markets," Chapters,in: Handbook of Research Methods and Applications in Empirical Finance, chapter 11, pages 256-284 Edward Elgar Publishing.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bfr:fisrev:2008:11:9. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael brassart). General contact details of provider: http://edirc.repec.org/data/bdfgvfr.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.