پول و نقدینگی در بازارهای مالی

We argue that there is a connection between the interbank market for liquidity and the broader financial markets, which has its basis in demand for liquidity by banks. Tightness in the market for liquidity leads banks to engage in what we term “liquidity pull-back,” which involves selling financial assets either by banks directly or by levered investors. Empirical tests on the stock market are supportive. Tighter interbank markets are associated with relatively more volume in more liquid stocks; selling pressure, especially in more liquid stocks; and transitory negative returns. We control for market-wide uncertainty and in the process also contribute to the literature on portfolio rebalancing. Our general point is that money matters in financial markets.

We study the connection between the interbank market for liquidity and the broader financial markets. That such a connection exists is suggested, for example, by the experience of the recent financial crisis, which saw both a breakdown in the interbank market and a collapse in the prices of financial assets. However, our focus is not on the crisis, but rather on the day-to-day interaction between the interbank market for liquidity and financial market activity. The paper makes three contributions. First, it advances what we call the liquidity pull-back hypothesis, which addresses how demand for liquidity by banks impacts on financial market activity. Second, we test and find supportive evidence for this hypothesis by examining stock market volume, order imbalance, and returns. Third, as a byproduct of controlling for market-wide uncertainty in the testing of the liquidity pull-back hypothesis, we document relations between uncertainty, stock liquidity, and trading activity that may help shed light on how agents rebalance portfolios in response to fluctuations in market-wide uncertainty. In broad terms, the paper bridges two different concepts of liquidity, namely, the finance idea that liquidity is a property of an asset and the central banking and monetary economics concept of liquidity simply as high powered money. There is evidence in the extant literature that financial markets are affected by monetary phenomena. For example, returns in bond and equity markets appear to be influenced by monetary shocks (Fleming and Remolona, 1997, Fair, 2002 and Piazzesi, 2005) and fund flows (Edelen and Warner, 2001, Boyer and Zheng, 2009 and Goetzmann and Massa, 2002), as are measures of liquidity in these markets (Chordia, Sarkar, and Subrahmanyam, 2005). However, we are not aware of research that explicitly posits and documents a link between the interbank market and the stock markets, as we do in this paper. Our line of reasoning has its basis in a money and banking perspective on financial market activity. Banks need liquidity, or central bank money, to satisfy reserve requirements, allow depositor withdrawals, etc. The central bank determines the quantity of liquidity via its operations and then the interbank market (re)allocates it. However, if the price of liquidity in the interbank market is high, alternative sources of liquidity may be more attractive. Banks that have exhausted credit limits, must look for alternative sources. But to paraphrase Friedman (1970), “One bank can increase its money balances only by persuading another one to decrease its balances.” 1 And as emphasized by Tobin (1980), “The nominal supply of money is something to which the economy must adapt, not a variable that adapts itself to the economy – unless the policy authorities want it to.” So what alternatives to the interbank market are there? Banks have, in fact, several alternatives. They can go to the discount window, but this is expensive and a last resort. They can try to induce more deposits, but this is unlikely to be effective within a short time span. Rather, the alternative that we wish to emphasize here is pulling back liquidity from the financial markets. This can be done in several ways. The most obvious one is through selling financial assets.2 This could occur through the mechanism of a banks' internal liquidity management system feeding into trading desks' limits. Alternatively, a bank can increase margins to investors, which in turn may lead to asset sales as investors seek to meet margin requirements. Increasing haircuts in repos has a similar effect. These actions do not increase the quantity of liquidity in the system, but they can increase the selling bank's liquidity balances, as long as the buying counterparty banks with another bank. One can think of liquidity pull-back as a bank dipping its ladle into the “ocean” of financial assets, recovering for itself liquidity granted to a counterparty some time in the past and stored all the while in the financial asset that now is being sold. Thus, we argue that there is a connection between the interbank market for liquidity and the broader financial markets arising from (the possibility of) liquidity pull-back. Liquidity pull-back trading is arguably most likely to occur if the interbank market is not allocatively efficient. The crisis is an example of it being so; volume in the interbank market fell (Cassola, Holthausen, and Lo Duca, 2009) while central banks around the world injected vast amounts of liquidity to counteract banks' unwillingness to lend to each other. In addition, Bindseil, Nyborg, and Strebulaev (2009) find evidence that there is a degree of allocational inefficiency in the interbank market even during what we think of as times of normalcy, and Fecht, Nyborg, and Rocholl (2011) find evidence that interbank liquidity networks, which are intended to overcome imperfections in the interbank market, are not always effective. We expect tighter interbank markets to be associated with a higher level of liquidity pull-back activity. This has implications for volume, order imbalance, and returns. The implication of liquidity pull-back on volume is cross-sectional in nature. In particular, the liquidity pull-back effect on volume should be felt differentially across assets, depending on their degree of liquidity in the financial economics sense of the word. By definition, trade in a highly liquid asset involves lower price impact, or transaction costs, on average, than an equivalent trade in a less liquid asset (Black, 1971 and Kyle, 1985). The implication, and our central hypothesis, is thus that increased tightness in the interbank market for liquidity is associated with an increase in the volume of more liquid assets relative to that of less liquid assets. 3 We expect this relation because when interbank markets function well, banks that hold excess liquidity place this with banks that are short; whereas when interbank markets work less well, banks that are short make use of the more indirect route of liquidity pull-back to obtain the liquidity they need. With respect to order imbalance, an immediate implication of the liquidity pull-back hypothesis is that increased tightness in the interbank market puts negative pressure on the aggregate order flow of financial assets. Since highly illiquid assets may not be suitable for liquidity pull-back, for example, due to discontinuities and a lack of depth in the order book, we would expect to observe selling pressure especially in more liquid assets in response to increased tightness in the interbank market. Tighter interbank markets, ceteris paribus, also should be associated with offsetting drops in asset prices. This is so as to equalize, insofar as possible, the cost of acquiring liquidity directly in the interbank market versus acquiring it indirectly by engaging in liquidity pull-back. Put in a different way, selling a financial asset can be thought of as an act of converting low powered money (financial assets) into higher powered money (liquidity). When the price of liquidity goes up, the price of conversion also rises and asset prices therefore fall. Or put in more standard terms, selling pressure will have a negative effect on returns. The initial price impact from liquidity pull-back would be expected to reverse, as the need for pull-back subsides. This differentiates the pull-back hypothesis, with respect to returns, from an information-based story. Cross-sectionally, liquidity pull-back has an equalizing effect on returns. The logic is that in equilibrium the marginal costs of converting assets into higher powered money should be equalized, as far as possible, across assets. We test the implications of the liquidity pull-back hypothesis on the Center for Research in Security Prices (CRSP) universe of stocks using the three-month Libor-OIS spread as our main measure of tightness in the interbank market. Some tests are also run with the TED spread, for which we have a longer time series.4 The Libor-OIS spread is arguably a more precise measure of the state of the interbank market, since it is the difference between two interbank rates, rather than an interbank and a Treasury rate. While it is possible that liquidity pull-back is prevalent in the Treasury security or broader fixed income markets, testing our hypotheses using the CRSP universe of stocks offers several advantages. First, the data are reliable and of high quality. Second, there are thousands of stocks, with a wide range of liquidity levels. Third, there is homogeneity in trading infrastructure. The empirical design involves forming portfolios of stocks based on the Amihud (2002) price impact measure of liquidity (or illiquidity). Our predictions are largely confirmed in the data: First, the market share of volume of highly liquid stocks is increasing in either interest rate spread. Second and third, an increase in the Libor-OIS spread is associated with (i) an increase in selling pressure, especially for more liquid stocks, as measured by changes in order imbalance, and (ii) negative returns that partially reverse within a few days.5 Fourth, for the portfolios consisting of the 40–60% most liquid stocks, which comprise roughly 97–99% of daily volume on average, the magnitudes of the initial price reactions and reversals are similar. These results are consistent with the liquidity pull-back hypothesis, especially for more liquid stocks. In testing the implications of the liquidity pull-back hypothesis, we control for market-wide uncertainty, as measured by the VIX, and other factors.6 Thus, we control for the alternative hypothesis that our findings are the result of portfolio rebalancing by investors who seek to reduce equity exposures as volatility increases [see, e.g., Ritter, 1988; Hau and Rey, 2004; Calvet, Campbell, and Sodini, 2009, for evidence on portfolio rebalancing]. We find that the market share of volume of more liquid stocks is increasing in that part of the Libor-OIS spread that cannot be explained by the VIX. This is strong evidence in support of the liquidity pull-back hypothesis. The market share of volume of more liquid stocks is also increasing in the VIX itself as well as that part of it that cannot be explained by the Libor-OIS spread. This is supportive of a “flight to safety” effect, whereby increased volatility leads to a relative increase in the sale of more liquid stocks as the price impact per unit is smaller for these stocks (as outlined above). In short, our evidence suggests that liquidity pull-back and portfolio rebalancing exist side-by-side. This conclusion is supported by our findings on order imbalance and returns. An increase in the VIX is associated with increased selling pressure and negative returns, just as for an increase in the price of liquidity. We do not find the return reversal effect with the VIX that we see with the Libor-OIS spread. The impact of the VIX is instantaneous. This supports the view that tightness in the interbank market is fundamentally a distinct phenomenon from market-wide uncertainty. While we use it as a general measure of tightness in the interbank market, the Libor-OIS spread can be viewed more specifically as a measure of the price of liquidity. A “Libor transaction” gives the borrower a fixed quantity of liquidity for a fixed period of time at a fixed rate. The alternative (in the unsecured end of the market) is borrowing overnight and hedging the interest rate risk using the OIS. But this entails quantity risk; a bank cannot be sure that it will get the desired quantity of liquidity every day over the next three months, say.7 While the Libor-OIS spread thus captures the extra cost of having the liquidity for sure, we believe it may also reflect quantity constraints. The drop in interbank activity during the crisis (especially at the longer end) supports this view. In addition, Gorton and Metrick (2012) find that high Libor-OIS spreads coincide with increased haircuts in repos. From a theoretical perspective, standard Akerlof (1970) adverse selection reasoning yields a positive relation between the price of liquidity and unsatiated demand.8 Thus, the Libor-OIS spread may be viewed as a general measure of interbank tightness as well as a specific measure of the price of liquidity. The empirical analysis in this paper is motivated by the theoretical framework sketched above. A less bank-centric line of reasoning that is consistent with our findings is as follows: Higher spreads imply higher funding costs for investors, as banks pass on their own borrowing costs. As a result, stock prices fall. In turn, this leads to margin calls and portfolio rebalancing, as already described. This still implies a connection between the interbank market for liquidity and the broader financial markets, but the role of banks is deemphasized. Our perspective differs from that of Grossman and Miller (1988) and Brunnermeier and Pedersen (2009), where selling pressure originates in the asset market rather than the money market. Brunnermeier and Pedersen, in particular, emphasize how a liquidity event in the asset market can lead to dramatic falls in prices, as providers of funding liquidity may tighten margins too much if they are uninformed about the cause of the liquidity event. In our framework, a severe decline in stock prices could potentially be triggered by unrest in the interbank market, for example, arising from extreme adverse selection in that market. Both of these perspectives may well be relevant for understanding the collapse in the stock markets during the crisis. It bears emphasis, however, that the liquidity pull-back hypothesis is not fundamentally about the crisis. Indeed, we find stronger evidence for the presence of liquidity pull-back over the pre-crisis period than over the crisis period. While at first glance this may seem surprising, it may well be the result of loose monetary policy during the crisis. TAF (term auction facility) and other tools were introduced to help banks get liquidity, thus reducing the need for banks to engage in liquidity pull-back.9 This paper is related to several other literatures. Liquidity pull-back is a potential contributor to the commonality in liquidity found by Chordia, Roll, and Subrahmanyam (2000), Hasbrouck and Seppi (2001) and Huberman and Halka (2001). We also contribute to the literature on trading volume (e.g., Ying, 1966, Karpoff, 1987 and Lo and Wang, 2000) by documenting that the Libor-OIS and TED spreads are associated with cross-sectional variations in volume and to the literature on the associations between trading activity, liquidity, and stock returns (e.g., Chordia, Roll, and Subrahmanyam, 2002). The rest of this paper is organized as follows. Section 2 describes the main data, provides descriptive statistics, and defines the volume measures that we subsequently use in our tests. Section 3 studies volume, testing the liquidity pull-back and portfolio rebalancing hypotheses. Section 4 introduces the data used to measure order imbalance and provides an analysis of order imbalance and returns. Section 5 concludes.

We have argued that there is a connection between the interbank market for liquidity and the broader financial markets, which has its basis in demand for liquidity by banks. Tightness in the interbank market for liquidity leads banks to engage in what we term liquidity pull-back, which involves selling financial assets either by banks directly or by levered investors. This does not increase the stock of money in aggregate, but can increase the money balances of an individual bank. This line of reasoning has implications that relate to volume, returns, and order imbalance, and the body of the paper is devoted to testing these. The implications are verified in the data. First, consistent with the liquidity pull-back hypothesis, we find that the market share of volume of relatively more liquid stocks is increasing in the price of liquidity, as measured by the Libor-OIS spread. In some of our analysis, we have also run parallel tests using the TED spread, without this changing the qualitative findings. Interestingly, we find strong evidence for liquidity pull-back over the pre-crisis period, but only weak evidence over the post-TAF period. We think this makes sense in light of the loose monetary policy post-TAF. For the pre-crisis period, the results are especially strong for the four decile portfolios consisting of the 40% most liquid stocks, representing approximately 97% of daily volume on average. By using the VIX as a control variable, we have also examined the alternative hypothesis that it is portfolio rebalancing in response to changes in volatility that drives the relation we have uncovered between the price of liquidity in the interbank market and the market share of volume of stocks of different liquidity levels. Our evidence suggests that both such portfolio rebalancing and liquidity pull-back are going on. Unlike liquidity pull-back, however, the evidence for portfolio rebalancing is also strong post-TAF. Second, consistent with the liquidity pull-back hypothesis, we also find that increases in the Libor-OIS spread are associated with selling pressure in the market as a whole and especially for more liquid stocks. Third, increases in the Libor-OIS spread have a transitory negative impact on returns. Fourth, the magnitudes of the return effect are similar for the portfolios consisting of the 60% most liquid stocks, representing approximately 99% of daily volume on average. Increases in the VIX are also associated with selling pressure and negative returns. The effect is differentiated from that of the Libor-OIS spread, however, by the impact of the VIX being instantaneous. Overall, our findings on volume, order imbalance, and returns provide strong supportive evidence for the liquidity pull-back hypothesis. The results are especially strong for the 40% most liquid stocks. The results are weaker for the 40% least liquid stocks. These stocks, which constitute less than 0.6% of total volume on a given day, may simply be too small and illiquid to be a significant systematic part of liquidity pull-back trading. Amihud and Mendelson (1986) and Longstaff (2009) show that portfolios may be optimally tilted away from illiquid financial assets by agents that have more immediate liquidity needs. The perspective we advance in this paper is that an important function of financial markets is to act as a liquidity storage facility that players can dip into when they need liquidity (in the monetary sense). In many ways, this is not new. It is present or implicit in models of intertemporal saving. It is also explicit in the idea of “liquidity traders” in the literatures on noisy rational expectations equilibria and market microstructure. In simplistic terms, our point is that banks can act as liquidity traders as well, or force liquidity trading by levered investors through increasing margins or haircuts. A bank may engage in this when it needs high-powered money but the price it faces in the interbank market is too high or its interbank credit limits are exhausted. Selling a financial asset can be thought of as an act of converting low-powered money (financial assets) into high-powered money (liquidity). When the price of liquidity goes up, the price of conversion also rises and asset prices therefore fall. Thus, asset prices fluctuate with the price of liquidity, which is consistent with our findings. On a more macro level, the implication is that if there is not sufficient liquidity in the system to satisfy banks' demand in aggregate, asset prices fall as banks start to engage in liquidity pull-back. In such a state, if additional liquidity is injected by the central bank, the value of higher-powered money should fall and this would show up as an increase in the prices of financial assets. The fall in asset prices during the crisis and their subsequent rise following the Fed's first quantitative easing program in March 2009 could be viewed as an example of this phenomenon. The framework for thinking about money and liquidity in financial markets that we have outlined in this paper may be relevant for a number of other liquidity phenomena. As an example, consider the phenomenon of increased correlations during crisis times (King and Wadhwani, 1990) and “flight to quality” (Sundaresan, 2009, p. 343). While much of these effects may be due to increased uncertainty, there may also be a liquidity pull-back effect present. The liquidity pull-back interpretation of the phenomenon of increased correlations in crisis is that these are times when liquidity is extremely dear or difficult to get in the interbank market. Banks therefore engage in liquidity pull-back. Put differently, there is a (financial market) credit contraction. The conjecture is that the worse conditions are in the interbank market, the larger are asset cross-correlations and the stronger will flight to quality appear to be.