Market liquidity and funding liquidity: Empirical analysis of liquidity flows using VAR framework
Adam Czelleng ()
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Adam Czelleng: Faculty of Finance and Accountancy, Budapest Business School, Buzogany u. 10-12, Budapest, H-1149, Hungary
Acta Oeconomica, 2020, vol. 70, issue 4, 513-530
Abstract:
One of the many consequences of financialization in the past decades has been the significant appreciation of the importance of financial markets’ liquidity. In order to maintain financial stability, one must have a clear understanding of the sources of market liquidity (ML). A finer comprehension of liquidity and its direction would help policy makers in fine-tuning the current regulations while also identifying each of the elements that compose it. In this paper, a recursive vector autoregressive model is utilized to empirically analyze how to detect the causality relations between funding and ML in four post-communist countries (Czech Republic, Hungary, Slovakia and Poland). For the analyses freely accessible data on the balance sheets of aggregated banking sectors was utilized with the overall aim of finding a proxy for funding liquidity (FL) in every examined country. As a proxy for ML, government bonds’ bid-ask spreads were utilized in the model. The paper provides an empirical evidence that FL drives ML in each economy. The results are clear, statistically significant and robust. They can be understood as evidence for the importance of the role of the trader’s FL for the liquidity of financial assets’ markets. The results of the paper have important implications for monetary policy, as well as micro- and macro-prudential regulation.
Keywords: liquidity; vector autoregression; financial market; financial regulation (search for similar items in EconPapers)
JEL-codes: G10 G21 G28 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:aka:aoecon:v:70:y:2020:i:4:p:513-530
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