Equity price is cyclical and often leads the business cycle. These observations have led to the hypothesis that shocks to equity market liquidity are an independent source of the business cycle. In this paper I construct a tractable model to evaluate this hypothesis. After calibrating the model to the US data, I find that a negative liquidity shock in the equity market can generate large reduct...

In over-the-counter markets, the presence of two frictions is central to determine prices, liquidity, and efficiency: the search friction reflected in how long it takes to find a trading opportunity and the bargaining friction reflected in how promptly gains from trade are realized once the opportunity is identified. This paper captures both frictions by introducing an asset-specific trade dela...

This paper examines the dynamic relationship between credit risk and liquidity in the sovereign bond market in the context of the European Central Bank (ECB) interventions. Using a comprehensive set of liquidity measures obtained from a detailed, quote-level dataset of the largest interdealer market for Italian government bonds, we show that changes in credit risk, as measured by the Italian so...

The aims of this study are to examine how liquidity in the Government of Canada securities market has evolved over the 1990s and to determine what factors influence the level of liquidity in this market, with some comparisons to the U.S. Treasury securities market. We find empirical support for the hypothesis that an increase in effective supply of the securities enhances market liquidity. Empi...

What are the linkages between the maturity of corporate debt, the liquidity of financial markets and the real economy? Relative to developed countries, firms on emerging economies borrow at shorter maturities and assets are traded in markets with larger frictions. This paper studies how firms choose and finance long-term investment projects in a production economy subject to an over-the-counter...

I explore the role of financial intermediaries in supplying liquidity over the business cycle. I consider a model similar to Holmstrom and Tirole (1998), in which firms hold assets to shift current funds to future periods when they may be borrowing constrained. Financial intermediaries insure against loss of credit access by issuing credit lines, but intermediaries are also subject to agency co...

This paper presents a theory of liquidity cycles based on endogenous fluctuations in economic activity and the availability of informed capital. Risky assets are illiquid due to adverse selection. The degree of adverse selection and hence the liquidity of these assets depends on the endogenous information structure in the market. Liquidity provision is modeled as a repeated game with imperfect ...

Large value payment and securities settlement systems are important components of an economy's nancial system. Many such systems are operated by central banks and are liquidity intensive. Central banks often provide inexpensive liquidity to facilitate settlement. This leads to a number of policy questions about the provision of such liquidity. To answer these questions, central banks need to un...

This paper discusses liquidity regulation when short-term funding is the marginal funding source of credit growth but generates negative systemic risk externalities. It studies the relative merits of price versus quantity tools, showing that a second best solution may generally involve the use of both types of tools. When banks differ in their credit opportunities, a Pigovian tax on short-term ...

We develop a model of liquidity shortages that incorporates general equilibrium feature liquidity: when banks hold more liquidity, other agents in the economy less it and will supply times crisis. show private holdings at are inefficient, with direction bias being determined by characteristics suppliers to banks. Minimum requirements for may reduce welfare; such cases interest rate policies sti...