Funding liquidity shocks and market liquidity providers

Doojin Ryu, Robert I. Webb and Jinyoung Yu

Finance Research Letters, 2022, vol. 47, issue PB

Abstract: We examine the relationship between funding liquidity and stock market liquidity. Positive (negative) funding liquidity shocks enhance market liquidity for medium-sized (large and small) firms before Korea adopts the Basel III accord, whereas changes in funding liquidity, in general, precedes changes in market liquidity afterward. The regime-dependent relationship is attributed to the change in domestic individuals’ reaction to funding liquidity shocks. Domestic investors act as liquidity providers for the overall market as funding liquidity improves, while foreigners only trade shares of small firms in response to funding liquidity shocks.

Keywords: Basel III; Funding liquidity; Investor type; Stock market liquidity (search for similar items in EconPapers)
JEL-codes: G11 G12 G21 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:47:y:2022:i:pb:s1544612322000575

DOI: 10.1016/j.frl.2022.102734

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