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Money and liquidity in financial markets


Nyborg, Kjell G; Östberg, Per Nils Anders (2014). Money and liquidity in financial markets. Journal of Financial Economics, 112(1):30-52.

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 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 on the stock market are supportive. Tighter interbank markets are associated with relatively more volume in more liquid stocks; selling pressure, especially in more liquid stocks; and transitory negative returns. We control for market-wide uncertainty and in the process also contribute to the literature on portfolio rebalancing. Our general point is that money matters in financial markets.

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 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 on the stock market are supportive. Tighter interbank markets are associated with relatively more volume in more liquid stocks; selling pressure, especially in more liquid stocks; and transitory negative returns. We control for market-wide uncertainty and in the process also contribute to the literature on portfolio rebalancing. Our general point is that money matters in financial markets.

Citations

4 citations in Web of Science®
5 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:4 May 2014
Deposited On:05 Mar 2014 17:23
Last Modified:05 Apr 2016 17:44
Publisher:Elsevier
ISSN:0304-405X
Publisher DOI:https://doi.org/10.1016/j.jfineco.2013.12.003
Official URL:http://www.sciencedirect.com/science/article/pii/S0304405X13003036
Related URLs:http://www.zora.uzh.ch/72506/
Other Identification Number:merlin-id:9280
Permanent URL: https://doi.org/10.5167/uzh-93848

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