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Are Hungarian financial markets liquid enough? The theory and practice of FX and government securities market liquidity

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  • Csaba Csávás

    (Magyar Nemzeti Bank)

  • Szilárd Erhart

    (Magyar Nemzeti Bank)

Abstract

The subject of our study is market liquidity, which is an important element of the functioning of financial markets. Adequate liquidity of markets is of great significance from the point of view of both market participants and the central bank. On the one hand, of all market segments an examination was made of the domestic forint-euro spot FX market, which is of key importance due to the openness of the country’s economy. On the other hand, an analysis was made of the market of forint denominated government bonds, which plays a crucial role in the transmission of the central bank’s interest rate policy. Several useful lessons can be drawn from looking over the literature dealing with the measurement of market liquidity. First, liquidity can unambiguously be interpreted only alongside several liquidity dimensions. The so-called tightness dimension of liquidity can be measured by the transaction costs, a typical indicator of which is the bid-ask spread. Another important dimension is market depth, and market turnover is most often used in literature as its approximation indicator. Accordingly, in the course of empirical examinations, the two main liquidity indicators, i.e. the bid-ask spread and turnover were examined not only separately, but also in terms of their relationship. Another important conclusion to be drawn is that individual liquidity indicators may often signal changes in different directions of market liquidity, and this is one of the reasons why it is important to look at individual indicators together.

Suggested Citation

  • Csaba Csávás & Szilárd Erhart, 2005. "Are Hungarian financial markets liquid enough? The theory and practice of FX and government securities market liquidity," MNB Occasional Papers 2005/44, Magyar Nemzeti Bank (Central Bank of Hungary).
    • Handle: RePEc:mnb:opaper:2005/44
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    File URL: http://www.mnb.hu/letoltes/op-44.pdf
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    References listed on IDEAS

    as
    1. Michael J. Fleming, 2003. "Measuring treasury market liquidity," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 83-108.
    2. Toni Gravelle, 1999. "Liquidity of the Government of Canada Securities Market: Stylised Facts and Some Market Microstructure Comparisons to the United States Treasury Market," CGFS Papers chapters, in: Bank for International Settlements (ed.), Market Liquidity: Research Findings and Selected Policy Implications, volume 11, pages 1-37, Bank for International Settlements.
    3. Craig H Furfine & Eli M Remolona, 2002. "What's behind the liquidity spread? On-the-run and off-the-run US Treasuries in autumn 1998," BIS Quarterly Review, Bank for International Settlements, June.
    4. Michael J. Fleming & Eli M. Remolona, 1999. "Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information," Journal of Finance, American Finance Association, vol. 54(5), pages 1901-1915, October.
    5. Huang, Roger D & Masulis, Ronald W, 1999. "FX Spreads and Dealer Competition across the 24-Hour Trading Day," The Review of Financial Studies, Society for Financial Studies, vol. 12(1), pages 61-93.
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    Cited by:

    1. Apergis, Nicholas & Voliotis, Dimitrios, 2015. "Spillover effects between lit and dark stock markets: Evidence from a panel of London Stock Exchange transactions," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 101-106.
    2. Szabolcs Szikszai & Tamás Badics & Csilla Raffai & Zsolt Stenger & András Tóthmihály, 2013. "Studies in Financial Systems No 8 Hungary," FESSUD studies fstudy08, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.

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    More about this item

    Keywords

    Market liquidity; financial markets; bid-ask spread; market turnover.;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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