Liquidity and Financial Market Stability

Arbeitspapier

Liquidity occupies a central importance for many areas of finance. But there are very disparate views of liquidity, and correspondingly many different policy implications attached to these views. In this paper, I consider the many faces of liquidity and their implications for financial market stability. In particular, I focus on the traditional economics view of liquidity as destabilizing and the more positive microstructure view of liquidity as a positive attribute for both traders and markets. I outline the various policy prescriptions for market stability that arise from these disparate views, and how they relate to current market developments. I then consider a new view of liquidity deriving from the new research on uncertainty aversion, and I detail what this approach implies for market stability. I conclude by summarizing the implications for public policy and central bank behavior toward liquidity.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: NBB Working Paper ; No. 55

Classification and Topics

• Classification: Wirtschaft
• Subject: Finanzmarkt ; Betriebliche Liquidität ; Bankenliquidität ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): O'Hara, Maureen
• Event: Veröffentlichung
• (who): National Bank of Belgium
• (where): Brussels
• (when): 2004

Further information

• Handle: http://hdl.handle.net/10419/144269
• Last update: 10.03.2025, 11:43 AM CET