TY  - JOUR
AU  - Brunnermeier,Markus K.
AU  - Pedersen,Lasse Heje
TI  - Market Liquidity and Funding Liquidity
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12939
PY  - 2007
Y2  - February 2007
UR  - http://www.nber.org/papers/w12939
L1  - http://www.nber.org/papers/w12939.pdf
N1  - Author contact info:
Markus K. Brunnermeier
Princeton University
Department of Economics
Bendheim Center for Finance
Princeton, NJ 08540
Tel: 609/258-4050
Fax: 609/258-0771
E-Mail: markus@princeton.edu

Lasse H. Pedersen
NYU Stern Finance
44 West Fourth Street
Suite 9-190
New York, NY 10012
Tel: 212/998-0359
Fax: 212/995-4233
E-Mail: lpederse@stern.nyu.edu
AB  - We provide a model that links an asset's market liquidity - i.e., the ease with which it is traded - and traders' funding liquidity - i.e., the ease with which they can obtain funding. Traders provide market liquidity, and their ability to do so depends on their availability of funding. Conversely, traders' funding, i.e., their capital and the margins they are charged, depend on the assets'  market liquidity. We show that, under certain conditions, margins are destabilizing and market liquidity and funding liquidity are mutually reinforcing, leading to liquidity spirals. The model explains the empirically documented features that market liquidity (i) can suddenly dry up, (ii) has commonality across securities, (iii) is related to volatility, (iv) is subject to "flight to quality", and (v) comoves with the market, and it provides new testable predictions.
ER  -