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Market Liquidity and Funding Liquidity: An Empirical Investigation

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  • Giorgio Valente

    (University of Leicester and Hong Kong Institute for Monetary Research)

Abstract

We provide empirical evidence that the relationship between market and funding liquidity display significant nonlinearities, consistent with theories of market trading with financially-constrained agents. Using data for the US equity market, we uncover nonlinearities that are consistent with a model with two extreme regimes: a lower regime characterized by the absence of correlation between market liquidity and funding liquidity, and an upper regime where the two variables are statistically positively correlated. Over the sample period the two variables are uncorrelated most of the time, since shocks to funding liquidity are economically small. This situation persists until agents are forced towards their capital constraints and shocks to funding liquidity becomes economically important.

Suggested Citation

  • Giorgio Valente, 2010. "Market Liquidity and Funding Liquidity: An Empirical Investigation," Working Papers 152010, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:152010
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    References listed on IDEAS

    as
    1. Shleifer, Andrei & Vishny, Robert W, 1997. "The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
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