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The impact of funding liquidity on market quality

Wei-Peng Chen, Shu Ling Lin, Jun Lu and Chih-Chiang Wu

The North American Journal of Economics and Finance, 2018, vol. 44, issue C, 153-166

Abstract: This study analyzes market quality during the 2007–2008 credit crunch, by examining the impact of funding liquidity on market liquidity and price discovery of S&P 500 exchange-traded funds (i.e., S&P 500 depositary receipts [SPYs]) and index futures (E-minis). The empirical results show that funding liquidity affects market liquidity, and that the impact of illiquidity contagion between SPYs and E-minis was significant during the subprime mortgage crisis. In particular, the contagion effects between the two markets mediate the impact of funding illiquidity on market liquidity during the credit crunch. Considering the influences of other market factors on price discovery, we suggest that E-mini index futures made less contributions to price discovery during the credit crunch compared to normal periods. The empirical finding emphasizes the importance of the contagion effect between ETF and E-mini futures markets, when they suffer from external shocks.

Keywords: Funding liquidity; Market quality; Price discovery; Market liquidity; Spillover (search for similar items in EconPapers)
JEL-codes: G13 G20 C32 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:ecofin:v:44:y:2018:i:c:p:153-166