Drivers of Market Liquidity - Regulation, Monetary Policy or New Players?

30 Pages Posted: 28 Sep 2018

See all articles by Clemens Bonner

Clemens Bonner

De Nederlandsche Bank; Tilburg University

Eward Brouwer

De Nederlandsche Bank

Iman van Lelyveld

De Nederlandsche Bank; VU University Amsterdam

Date Written: September 17, 2018

Abstract

Using transaction level data of Dutch fixed income markets, we analyze the drivers of market liquidity between 2014 and 2016. Our results differ significantly across asset classes and during more volatile periods. Policy interventions, such as favourable treatment in liquidity regulation increases the liquidity of bonds. The effects of unconventional monetary policy are mixed. On the whole it seems to reduce liquidity during normal times but supports it during more volatile periods. Market structure, i.e. the presence of High Frequency Traders (HFT), affects liquidity of sovereign but not of other bonds with reversed effects in more volatile periods. Bond specifics such as shorter maturity and higher ratings are consistently associated with higher liquidity.

Keywords: Liquidity, Financial Markets, Monetary Policy, Regulation.

JEL Classification: G18, G21, E42

Suggested Citation

Bonner, Clemens and Brouwer, Eward and van Lelyveld, Iman, Drivers of Market Liquidity - Regulation, Monetary Policy or New Players? (September 17, 2018). De Nederlandsche Bank Working Paper No. 605, Available at SSRN: https://ssrn.com/abstract=3253123 or http://dx.doi.org/10.2139/ssrn.3253123

Clemens Bonner (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Eward Brouwer

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Iman Van Lelyveld

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

VU University Amsterdam ( email )

Netherlands

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