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Drivers of market liquidity - Regulation, monetary policy or new players?

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Listed:
  • Clemens Bonner
  • Eward Brouwer
  • Iman van Lelyveld

Abstract

Using transaction level data of Dutch fixed income markets, we analyze the drivers of market liquidity between 2014 and 2016. Our results differ significantly across asset classes and during more volatile periods. Policy interventions, such as favourable treatment in liquidity regulation increases the liquidity of bonds. The effects of un- conventional monetary policy are mixed. On the whole it seems to reduce liquidity during normal times but supports it during more volatile periods. Market structure, i.e. the presence of High Frequency Traders (HFT), affects liquidity of sovereign but not of other bonds with reversed effects in more volatile periods. Bond specifics such as shorter maturity and higher ratings are consistently associated with higher liquidity.

Suggested Citation

  • Clemens Bonner & Eward Brouwer & Iman van Lelyveld, 2018. "Drivers of market liquidity - Regulation, monetary policy or new players?," DNB Working Papers 605, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:605
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    References listed on IDEAS

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    More about this item

    Keywords

    Liquidity; Financial Markets; Monetary Policy; Regulation;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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