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Market Liquidity and Funding Liquidity

Markus Brunnermeier () and Lasse Pedersen

No 12939, NBER Working Papers from National Bureau of Economic Research, Inc

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 the margins they are charged, depend 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) comoves with the market, and it provides new testable predictions.

JEL-codes: G12 G21 G24 (search for similar items in EconPapers)
Date: 2007-02
New Economics Papers: this item is included in nep-mst
Note: AP CF
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Published as Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 22(6), pages 2201-2238, June.

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Journal Article: Market Liquidity and Funding Liquidity (2009) 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
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