Money and liquidity in financial markets

Kjell Nyborg and Per Östberg

Journal of Financial Economics, 2014, vol. 112, issue 1, 30-52

Abstract: We argue that there is a connection between the interbank market for liquidity and the broader financial markets, which has its basis in demand for liquidity by banks. Tightness in the market for liquidity leads banks to engage in what we term “liquidity pull-back,” which involves selling financial assets either by banks directly or by levered investors. Empirical tests on the stock market are supportive. Tighter interbank markets are associated with relatively more volume in more liquid stocks; selling pressure, especially in more liquid stocks; and transitory negative returns. We control for market-wide uncertainty and in the process also contribute to the literature on portfolio rebalancing. Our general point is that money matters in financial markets.

Keywords: Money; Liquidity pull-back; Stock returns; Volume; Order imbalance (search for similar items in EconPapers)
JEL-codes: E41 E44 E51 G11 G12 G21 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (40)

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Related works:
Working Paper: Money and Liquidity in Financial Markets (2010)
Working Paper: Money and Liquidity in Financial Markets (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:112:y:2014:i:1:p:30-52

DOI: 10.1016/j.jfineco.2013.12.003

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