Liquidity and Financial Market Stability

Maureen O'Hara ()
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Maureen O'Hara: Cornell University

No 55, Working Paper Research from National Bank of Belgium

Abstract: Liquidity occupies a central importance for many areas of finance. But there are very disparate views of liquidity, and correspondingly many different policy implications attached to these views. In this paper, I consider the many faces of liquidity and their implications for financial market stability. In particular, I focus on the traditional economics view of liquidity as destabilizing and the more positive microstructure view of liquidity as a positive attribute for both traders and markets. I outline the various policy prescriptions for market stability that arise from these disparate views, and how they relate to current market developments. I then consider a new view of liquidity deriving from the new research on uncertainty aversion, and I detail what this approach implies for market stability. I conclude by summarizing the implications for public policy and central bank behavior toward liquidity.

Pages: 19 pages
Date: 2004-05
New Economics Papers: this item is included in nep-fin and nep-mac
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:200405-11

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