Market Liquidity and Funding Liquidity
We provide a model that links an asset's market liquidity (i.e., the ease with which it is traded) and traders' funding liquidity (i.e., the ease with which they can obtain funding). Traders provide market liquidity, and their ability to do so depends on their availability of funding. Conv...
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| Veröffentlicht in: | The Review of financial studies 2009-06, Vol.22 (6), p.2201-2238 |
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| container_issue | 6 |
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| container_title | The Review of financial studies |
| container_volume | 22 |
| creator | Brunnermeier, Markus K. Pedersen, Lasse Heje |
| description | We provide a model that links an asset's market liquidity (i.e., the ease with which it is traded) and traders' funding liquidity (i.e., the ease with which they can obtain funding). Traders provide market liquidity, and their ability to do so depends on their availability of funding. Conversely, traders' funding, i.e., their capital and margin requirements, depends on the assets' market liquidity. We show that, under certain conditions, margins are destabilizing and market liquidity and funding liquidity are mutually reinforcing, leading to liquidity spirals. The model explains the empirically documented features that market liquidity (i) can suddenly dry up, (ii) has commonality across securities, (iii) is related to volatility, (iv) is subject to "flight to quality," and (v) co-moves with the market. The model provides new testable predictions, including that speculators' capital is a driver of market liquidity and risk premiums. |
| doi_str_mv | 10.1093/rfs/hhn098 |
| format | Article |
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Traders provide market liquidity, and their ability to do so depends on their availability of funding. Conversely, traders' funding, i.e., their capital and margin requirements, depends on the assets' market liquidity. We show that, under certain conditions, margins are destabilizing and market liquidity and funding liquidity are mutually reinforcing, leading to liquidity spirals. The model explains the empirically documented features that market liquidity (i) can suddenly dry up, (ii) has commonality across securities, (iii) is related to volatility, (iv) is subject to "flight to quality," and (v) co-moves with the market. 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Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org. 2008</rights><rights>The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. 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Traders provide market liquidity, and their ability to do so depends on their availability of funding. Conversely, traders' funding, i.e., their capital and margin requirements, depends on the assets' market liquidity. We show that, under certain conditions, margins are destabilizing and market liquidity and funding liquidity are mutually reinforcing, leading to liquidity spirals. The model explains the empirically documented features that market liquidity (i) can suddenly dry up, (ii) has commonality across securities, (iii) is related to volatility, (iv) is subject to "flight to quality," and (v) co-moves with the market. The model provides new testable predictions, including that speculators' capital is a driver of market liquidity and risk premiums.</description><subject>Assets</subject><subject>Capital formation</subject><subject>Capital investments</subject><subject>Capital markets</subject><subject>Capital requirements</subject><subject>Central banks</subject><subject>Collateral</subject><subject>Corporate finance</subject><subject>Economic theory</subject><subject>Equilibrium</subject><subject>Financial margins</subject><subject>Financial securities</subject><subject>Financiers</subject><subject>Financing methods</subject><subject>Funding</subject><subject>Funding liquidity</subject><subject>Hedge funds</subject><subject>Investors</subject><subject>Liquidity</subject><subject>Margin requirements</subject><subject>Margined securities</subject><subject>Market structure</subject><subject>Prices</subject><subject>Risk premiums</subject><subject>Speculators</subject><subject>Studies</subject><subject>Volatility</subject><issn>0893-9454</issn><issn>1465-7368</issn><fulltext>true</fulltext><rsrctype>article</rsrctype><creationdate>2009</creationdate><recordtype>article</recordtype><recordid>eNp90E1Lw0AQgOFFFKzVi3ehCPYgxM5mNvtxlGJVqHjR87LdTGxqm7S7yaH_vpGIggdPA8PDMLyMXXK442BwEoo4WS4rMPqIDbiQWaJQ6mM2AG0wMSITp-wsxhUAcBQwYOMXFz6pGc3LXVvmZbMfuSofzdoqL6uP3-05OyncOtLF9xyy99nD2_Qpmb8-Pk_v54kXaJqEC3KoF7nARa605AIkh5wkkQfiRFqD0kZlpJwuSBa6AOWVAu3Io_YGh2zc392GetdSbOymjJ7Wa1dR3UaLiksEhR28_gNXdRuq7jebIkCqIVMduu2RD3WMgQq7DeXGhb3lYL962a6X7Xt1-KbHdbv93131bhWbOvxIhDTNFBd4AEgdc2Q</recordid><startdate>20090601</startdate><enddate>20090601</enddate><creator>Brunnermeier, Markus K.</creator><creator>Pedersen, Lasse Heje</creator><general>Oxford University Press</general><general>Oxford Publishing Limited (England)</general><scope>AAYXX</scope><scope>CITATION</scope><scope>8BJ</scope><scope>FQK</scope><scope>JBE</scope></search><sort><creationdate>20090601</creationdate><title>Market Liquidity and Funding Liquidity</title><author>Brunnermeier, Markus K. ; Pedersen, Lasse Heje</author></sort><facets><frbrtype>5</frbrtype><frbrgroupid>cdi_FETCH-LOGICAL-c439t-14ea38bd43bd786140610de6eec0e1ee88078975e7a8fe6f8f07c7708aec38c93</frbrgroupid><rsrctype>articles</rsrctype><prefilter>articles</prefilter><language>eng</language><creationdate>2009</creationdate><topic>Assets</topic><topic>Capital formation</topic><topic>Capital investments</topic><topic>Capital markets</topic><topic>Capital requirements</topic><topic>Central banks</topic><topic>Collateral</topic><topic>Corporate finance</topic><topic>Economic theory</topic><topic>Equilibrium</topic><topic>Financial margins</topic><topic>Financial securities</topic><topic>Financiers</topic><topic>Financing methods</topic><topic>Funding</topic><topic>Funding liquidity</topic><topic>Hedge funds</topic><topic>Investors</topic><topic>Liquidity</topic><topic>Margin requirements</topic><topic>Margined securities</topic><topic>Market structure</topic><topic>Prices</topic><topic>Risk premiums</topic><topic>Speculators</topic><topic>Studies</topic><topic>Volatility</topic><toplevel>peer_reviewed</toplevel><toplevel>online_resources</toplevel><creatorcontrib>Brunnermeier, Markus K.</creatorcontrib><creatorcontrib>Pedersen, Lasse Heje</creatorcontrib><collection>CrossRef</collection><collection>International Bibliography of the Social Sciences (IBSS)</collection><collection>International Bibliography of the Social Sciences</collection><collection>International Bibliography of the Social Sciences</collection><jtitle>The Review of financial studies</jtitle></facets><delivery><delcategory>Remote Search Resource</delcategory><fulltext>fulltext</fulltext></delivery><addata><au>Brunnermeier, Markus K.</au><au>Pedersen, Lasse Heje</au><format>journal</format><genre>article</genre><ristype>JOUR</ristype><atitle>Market Liquidity and Funding Liquidity</atitle><jtitle>The Review of financial studies</jtitle><stitle>Rev Finan Stud</stitle><date>2009-06-01</date><risdate>2009</risdate><volume>22</volume><issue>6</issue><spage>2201</spage><epage>2238</epage><pages>2201-2238</pages><issn>0893-9454</issn><eissn>1465-7368</eissn><abstract>We provide a model that links an asset's market liquidity (i.e., the ease with which it is traded) and traders' funding liquidity (i.e., the ease with which they can obtain funding). Traders provide market liquidity, and their ability to do so depends on their availability of funding. Conversely, traders' funding, i.e., their capital and margin requirements, depends on the assets' market liquidity. We show that, under certain conditions, margins are destabilizing and market liquidity and funding liquidity are mutually reinforcing, leading to liquidity spirals. The model explains the empirically documented features that market liquidity (i) can suddenly dry up, (ii) has commonality across securities, (iii) is related to volatility, (iv) is subject to "flight to quality," and (v) co-moves with the market. The model provides new testable predictions, including that speculators' capital is a driver of market liquidity and risk premiums.</abstract><cop>Oxford</cop><pub>Oxford University Press</pub><doi>10.1093/rfs/hhn098</doi><tpages>38</tpages><oa>free_for_read</oa></addata></record> |
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| identifier | ISSN: 0893-9454 |
| ispartof | The Review of financial studies, 2009-06, Vol.22 (6), p.2201-2238 |
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| language | eng |
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| source | Jstor Complete Legacy; Oxford University Press Journals All Titles (1996-Current); Business Source Complete |
| subjects | Assets Capital formation Capital investments Capital markets Capital requirements Central banks Collateral Corporate finance Economic theory Equilibrium Financial margins Financial securities Financiers Financing methods Funding Funding liquidity Hedge funds Investors Liquidity Margin requirements Margined securities Market structure Prices Risk premiums Speculators Studies Volatility |
| title | Market Liquidity and Funding Liquidity |
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