Central Banks And Dynamics Of Bond Market Liquidity

Prachi Deuskar and Timothy C Johnson
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Prachi Deuskar: Indian School of Business
Timothy C Johnson: Department of Finance, College of Business, University of Illinois at Urbana-Champaign

Working Papers from Centre for Advanced Financial Research and Learning (CAFRAL)

Abstract: This study investigates market illiquidity and flow-price dynamics, with particular attention to central banks, using a comprehensive dataset for Indian government bonds. While, theoretically, liquidity provision by central banks should promote market depth and stability, some argue that overly active interventions may actually have the opposite effect. We find that bond market liquidity improves with greater funding liquidity provision by the central bank. The small magnitude of this effect challenges theories implying a tight link between funding liquidity and market liquidity but alleviates concerns that large interventions in either direction - like quantitative easing or its reversal - may be destabilizing

Keywords: government bonds; market liquidity; funding liquidity (search for similar items in EconPapers)
JEL-codes: E51 G12 G18 (search for similar items in EconPapers)
Pages: 54
Date: 2016-03
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