From Funding Liquidity to Market Liquidity: Evidence from Danish Bond Markets

Jens Dick-Nielsen, Jesper Lund, Jacob Gyntelberg

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

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.
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.

Conference

ConferenceMidwest Finance Association 2014 Annual Meeting
LocationHyatt Regency
CountryUnited States
CityOrlando, FL
Period06/03/201408/03/2014
Internet address

Keywords

    Cite this

    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.
    Dick-Nielsen, Jens ; Lund, Jesper ; Gyntelberg , Jacob . / From Funding Liquidity to Market Liquidity : Evidence from Danish Bond Markets. Paper presented at Midwest Finance Association 2014 Annual Meeting , Orlando, FL, United States.48 p.
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    abstract = "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.",
    keywords = "Market liquidity, Funding liquidity, Government bonds, Covered bonds, Money markets",
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    Dick-Nielsen, J, Lund, J & Gyntelberg , J 2014, 'From Funding Liquidity to Market Liquidity: Evidence from Danish Bond Markets' Paper presented at, Orlando, FL, United States, 06/03/2014 - 08/03/2014, .

    From Funding Liquidity to Market Liquidity : Evidence from Danish Bond Markets. / Dick-Nielsen, Jens; Lund, Jesper; Gyntelberg , Jacob .

    2014. Paper presented at Midwest Finance Association 2014 Annual Meeting , Orlando, FL, United States.

    Research output: Contribution to conferencePaperResearchpeer-review

    TY - CONF

    T1 - From Funding Liquidity to Market Liquidity

    T2 - Evidence from Danish Bond Markets

    AU - Dick-Nielsen,Jens

    AU - Lund,Jesper

    AU - Gyntelberg ,Jacob

    PY - 2014

    Y1 - 2014

    N2 - 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.

    AB - 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.

    KW - Market liquidity

    KW - Funding liquidity

    KW - Government bonds

    KW - Covered bonds

    KW - Money markets

    M3 - Paper

    ER -

    Dick-Nielsen J, Lund J, Gyntelberg J. From Funding Liquidity to Market Liquidity: Evidence from Danish Bond Markets. 2014. Paper presented at Midwest Finance Association 2014 Annual Meeting , Orlando, FL, United States.