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Developments in financial market liquidity

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In recent years, financial market participants have become increasingly worried that the level and resilience of financial market liquidity has declined significantly, raising concerns over the efficiency of markets and increased the risks associated with a liquidity shock. This article reviews international research on the topic, and generally finds evidence for a decline in the level and resilience of liquidity, although it has been mixed across markets. We also assess liquidity conditions in the New Zealand government bond, funding and short-term money markets using common analytical measures of liquidity as well as drawing on discussions with numerous market participants. We find that liquidity has declined to varying degrees across the different markets, and while risks of a liquidity shock have risen, the decline has been manageable thus far. Section 1 of this article defines what liquidity is, section 2 discusses the global trends in liquidity, and section 3 examines liquidity conditions in New Zealand markets. Section 4 concludes.

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  • Andrew Kendall, 2016. "Developments in financial market liquidity," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 79, pages 1-16, April.
    • Handle: RePEc:nzb:nzbbul:apr2016:06
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    1. Mr. Tonny Lybek & Mr. Abdourahmane Sarr, 2002. "Measuring Liquidity in Financial Markets," IMF Working Papers 2002/232, International Monetary Fund.
    2. Cadamagnani, Fabrizio & Harimohan, Rashmi & Tangri, Kumar, 2015. "A bank within a bank: how a commercial bank’s treasury function affects the interest rates set for loans and deposits," Bank of England Quarterly Bulletin, Bank of England, vol. 55(2), pages 153-164.
    3. Bevan Cook, 2012. "What is the repo market? Why does it matter?," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 75, pages 13-21, December.
    4. Kevin Hoskin & Ian Nield & Jeremy Richardson, 2009. "The Reserve Bank's new liquidity policy for banks," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 72, pages 5-18, December.
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    1. Sarah Drought & Roger Perry & Adam Richardson, 2018. "Aspects of implementing unconventional monetary policy in New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 81, pages 1-22, May.

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