Drivers of Market Liquidity - Regulation, Monetary Policy or New Players?
30 Pages Posted: 28 Sep 2018
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: Suggested Citation