Money and Liquidity in Financial Markets

Kjell Nyborg and Östberg, Per

No 7905, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 interbank 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 support this hypothesis. While our data covers part of the recent crisis period, our results are not driven by the crisis. Our general point is that money matters in financial markets. Different financial assets have different degrees of moneyness (liquidity) and, as a result, there are systematic cross-sectional variations in trading activity as the price of liquidity, or the level of tightness, in the interbank market fluctuates.

Keywords: Money; Liquidity; Interbank and financial markets; Liquidity pull-back (search for similar items in EconPapers)
JEL-codes: E41 E44 E51 G12 G21 (search for similar items in EconPapers)
Date: 2010-06
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Money and liquidity in financial markets (2014)
Working Paper: Money and Liquidity in Financial Markets (2010)
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