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Central Banks And Dynamics Of Bond Market Liquidity

Author

Listed:
  • Prachi Deuskar

    (Indian School of Business)

  • Timothy C Johnson

    (Department of Finance, College of Business, University of Illinois at Urbana-Champaign)

Abstract

This study investigates market illiquidity and flow-price dynamics, with particular attention to central banks, using a comprehensive dataset for Indian government bonds. While, theoretically, liquidity provision by central banks should promote market depth and stability, some argue that overly active interventions may actually have the opposite effect. We find that bond market liquidity improves with greater funding liquidity provision by the central bank. The small magnitude of this effect challenges theories implying a tight link between funding liquidity and market liquidity but alleviates concerns that large interventions in either direction - like quantitative easing or its reversal - may be destabilizing

Suggested Citation

  • Prachi Deuskar & Timothy C Johnson, 2016. "Central Banks And Dynamics Of Bond Market Liquidity," Working Papers 022327, Centre for Advanced Financial Research and Learning (CAFRAL).
    • Handle: RePEc:ris:cafral:022327
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    File URL: https://www.cafral.org.in/sfControl/content/Speech/46201664559PM-Deuskar_Johnson_Paper.pdf
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    Keywords

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    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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