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.
Original languageEnglish
Publication date2014
Number of pages48
Publication statusPublished - 2014
EventMidwest Finance Association 2014 Annual Meeting - Hyatt Regency , Orlando, FL, United States
Duration: 6 Mar 20148 Mar 2014
Conference number: 63
https://www.openconf.org/MidwestFinance2014/openconf.php

Conference

ConferenceMidwest Finance Association 2014 Annual Meeting
Number63
LocationHyatt Regency
CountryUnited States
CityOrlando, FL
Period06/03/201408/03/2014
Internet address

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.",
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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

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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.