EconPapers    
Economics at your fingertips  
 

Market Liquidity and Funding Liquidity

Markus Brunnermeier () and Lasse Pedersen

Review of Financial Studies, 2009, vol. 22, issue 6, 2201-2238

Abstract: We provide a model that links an asset's market liquidity (i.e., the ease with which it is traded) and traders' funding liquidity (i.e., the ease with which they can obtain funding). Traders provide market liquidity, and their ability to do so depends on their availability of funding. Conversely, traders' funding, i.e., their capital and margin requirements, depends on the assets' market liquidity. We show that, under certain conditions, margins are destabilizing and market liquidity and funding liquidity are mutually reinforcing, leading to liquidity spirals. The model explains the empirically documented features that market liquidity (i) can suddenly dry up, (ii) has commonality across securities, (iii) is related to volatility, (iv) is subject to "flight to quality," and (v) co-moves with the market. The model provides new testable predictions, including that speculators' capital is a driver of market liquidity and risk premiums. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Date: 2009
References: Add references at CitEc
Citations: View citations in EconPapers (1235) Track citations by RSS feed

Downloads: (external link)
http://hdl.handle.net/10.1093/rfs/hhn098 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Market Liquidity and Funding Liquidity (2007) Downloads
Working Paper: Market liquidity and funding liquidity (2007) Downloads
Working Paper: Market Liquidity and Funding Liquidity (2007) Downloads
Working Paper: Market Liquidity and Funding Liquidity (2007) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:rfinst:v:22:y:2009:i:6:p:2201-2238

Ordering information: This journal article can be ordered from
http://www4.oup.co.uk/revfin/subinfo/

Access Statistics for this article

Review of Financial Studies is currently edited by Maureen O'Hara

More articles in Review of Financial Studies from Society for Financial Studies Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().

 
Page updated 2020-05-24
Handle: RePEc:oup:rfinst:v:22:y:2009:i:6:p:2201-2238