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Contemporaneous linkages: Funding liquidity and stock market spirals

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  • Ajay Kumar Mishra
  • Bhavik Parikh
  • Ronald W. Spahr

Abstract

We observe, especially during financial crisis periods, that central bank policies may trigger credit rationing and borrowing cost increases, resulting in contemporaneous institutional lender and market maker funding illiquidity. In turn, funding illiquidity is transmitted through banks and broker/dealers to market illiquidity of individual stocks. Thus, funding illiquidity, often originating with central bank monetary policy, is contemporaneously conveyed through institutional lenders, transferred to broker/dealers and spawns interconnected stock market illiquidity spirals and loss spirals. Our results are consistent and robust across different models that control for endogenous and exogenous factors.

Suggested Citation

  • Ajay Kumar Mishra & Bhavik Parikh & Ronald W. Spahr, 2021. "Contemporaneous linkages: Funding liquidity and stock market spirals," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5912-5929, October.
  • Handle: RePEc:wly:ijfiec:v:26:y:2021:i:4:p:5912-5929
    DOI: 10.1002/ijfe.2100
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