This paper shows empirically that funding liquidity drives market liquidity. As it becomes harder to secure term funding in the money markets, liquidity deteriorates in the Danish bond market. We show that the first principal component of bond market liquidity is driven by the market makers' ability to obtain funding. This effect holds true across both long and short term, government and covered bonds. We use MiFID data which provides a complete transaction level dataset for the Danish market covering both the subprime crisis and the Euro sovereign crisis. Furthermore, we verify the findings for other European government bonds using MTS data. The findings suggest that regulatory bond based liquidity buffers for banks will have limited effectiveness.
|Number of pages||48|
|Publication status||Published - 2014|
|Event||Midwest Finance Association 2014 Annual Meeting - Hyatt Regency , Orlando, FL, United States|
Duration: 6 Mar 2014 → 8 Mar 2014
Conference number: 63
|Conference||Midwest Finance Association 2014 Annual Meeting|
|Period||06/03/2014 → 08/03/2014|
Dick-Nielsen, J., Lund, J., & Gyntelberg , J. (2014). From Funding Liquidity to Market Liquidity: Evidence from Danish Bond Markets. Paper presented at Midwest Finance Association 2014 Annual Meeting , Orlando, FL, United States.