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The effect of funding liquidity regulation and ESG promotion on market liquidity

Author

Listed:
  • Judit Hevér

    (Central Bank of Hungary)

  • Péter Csóka

    (Institute of Finance, Corvinus University of Budapest, Centre for Economic and Regional Studies)

Abstract
Liquidity is a key consideration in financial markets, especially in times of financial crises. For this reason, regulatory attention to and measures in this field have been on the rise for the past years. Based on practical experience, regulations aiming at ensuring funding liquidity or, in general, reducing certain risky positions have the side effect of reducing market liquidity. To understand this effect, we extend a standard general equilibrium model with transaction costs of trading, endogenous market liquidity, and the modeling of regulation. We prove that funding liquidity regulation or divesting bad ESG assets reduces market liquidity.

Suggested Citation

  • Judit Hevér & Péter Csóka, 2023. "The effect of funding liquidity regulation and ESG promotion on market liquidity," CERS-IE WORKING PAPERS 2307, Institute of Economics, Centre for Economic and Regional Studies.
    • Handle: RePEc:has:discpr:2307
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    market liquidity; funding liquidity; general equilibrium model; regulatory requirement; ESG related assets;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    NEP fields

    This paper has been announced in the following NEP Reports:

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