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Money and liquidity in financial markets

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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

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Find related papers by JEL classification:
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
  • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
  • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
  • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
  • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
  • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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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," Journal of Financial Economics, Elsevier, vol. 102(2), pages 344-362.
  2. Fecht, Falko & Nyborg, Kjell G & Rocholl, Jörg, 2010. "The Price of Liquidity: Bank Characteristics and Market Conditions," CEPR Discussion Papers 7794, C.E.P.R. Discussion Papers.
  3. Florackis, Chris & Kontonikas, Alexandros & Kostakis, Alexandros, 2013. "Stock Market Liquidity and Macro-Liquidity Shocks: Evidence from the 2007-2009 Financial Crisis," SIRE Discussion Papers 2013-58, Scottish Institute for Research in Economics (SIRE).
  4. Florackis, Chris & Kostakis, Alexandros & Kontonikas, Alexandros, 2011. "Transmission of macro-liquidity shocks to liquidity-sorted stock portfolios’ returns: The role of the financial crisis," SIRE Discussion Papers 2011-31, Scottish Institute for Research in Economics (SIRE).
  5. Lim, Kian-Ping & Thian, Tze-Chung & Hooy, Chee-Wooi, 2015. "Corporate Shareholdings and the Liquidity of Malaysian Stocks: Investor Heterogeneity, Trading Account Types and the Underlying Channels," MPRA Paper 67602, University Library of Munich, Germany.
  6. Apergis, Nicholas & Artikis, Panagiotis G. & Kyriazis, Dimitrios, 2015. "Does stock market liquidity explain real economic activity? New evidence from two large European stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 38(C), pages 42-64.
  7. Azusa Takeyama & Naoshi Tsuchida, 2015. "The Interaction between Funding Liquidity and Market Liquidity: Evidence from Subprime and European Crises," IMES Discussion Paper Series 15-E-14, Institute for Monetary and Economic Studies, Bank of Japan.
  8. 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.
  9. Leo de Haan & Jan Willem van den End, 2011. "Banks' responses to funding liquidity shocks: lending adjustment, liquidity hoarding and fire sales," DNB Working Papers 293, Netherlands Central Bank, Research Department.
  10. Nyborg, Kjell G, 2015. "Central Bank Collateral Frameworks," CEPR Discussion Papers 10663, C.E.P.R. Discussion Papers.
  11. 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.

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