This paper analyzes systematic variations in market liquidity that arise in standard representative-agent endowment economies. I introduce a natural definition of liquidity that applies whether or not the model supports actual trade in securities. This fundamental endogenous liquidity is driven by the underlying risk dynamics of the economy, and hence does not depend on whatever drives demand f...

Article history: Received 8 August 2012 Received in revised form 18 June 2014 Accepted 1 July 2014 Available online 9 July 2014 This paper examines how stock market liquidity and commonality in liquidity are impacted by real-time output gap and inflation, as these macroeconomic variables have been shown to be the main drivers of monetary policy according to the Taylor rule. We show that an incr...

This paper assesses liquidity conditions in foreign exchange (FX) spot and derivatives markets using intra-day data against the background of FX dealers’ response to recent regulatory changes. Given that FX swap markets are by some measures even deeper that the spot market, an assessment of FX liquidity requires taking such instruments into account. We find that spot and swap market liquidity i...

This paper examines the relation between liquidity demands of corporate sector and investment decisions. It shows that the liquidity asset holding has two impacts on investments. First, the liquidity can absorb a liquidity shock and helps to continue a necessary project. Second, it helps to continue an undesirable project and decreases the incentive of firms. This negative aspect is quite simil...

We examine the optimal design of and interaction between capital and liquidity regulations. Banks, not internalizing fire sale externalities, overinvest in risky assets and underinvest in liquid assets in the competitive equilibrium. Capital requirements can alleviate the inefficiency, but banks respond by decreasing their liquidity ratios. When capital requirements are the only available tool,...

This study examines the relationship between government deficit and corporate liquidity (cash holdings). Using data of nonfinancial firms in Taiwan from 1981 to 2009, this study finds that corporate liquidity is lower when government deficit is higher. In addition, corporate liquidity is related with other macroeconomic conditions, such as inflation, short-term interest rate, and economic growt...

This paper examines the intraday behavior of market liquidity in an order-driven market. Along with previous studies, we show that the U-shaped intraday pattern of spread does not depend on the market architecture. We also find that bid-ask spread and market depth are two dimensions of market liquidity. Market liquidity is inversely related to price volatility. We also investigate the impacts o...

2 Liquidity as a resource 5 2.1 Lower truncated liquidity process . . . . . . . . . . . . . . . . . . 5 2.2 On reserve requirements . . . . . . . . . . . . . . . . . . . . . . . 7 2.3 Liquidity cost minimization . . . . . . . . . . . . . . . . . . . . . 7 2.4 Approximation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.5 Traffic burstiness . . . . . . . . . . . . . . . . . . . . . ...

We examine the impact of institutional trading on stock resiliency during the financial crisis of 2007–2009. We show that buy-side institutions have different exposure to liquidity factors based on their trading style. Liquidity supplying institutions absorb the long-term order imbalances in the market and are critical to recovery patterns after a liquidity shock. We show that these liquidity s...