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Marco Laganá

11 August 2006
This paper offers a new framework for the assessment of financial market liquidity and identifies two types: search liquidity and systemic liquidity. Search liquidity, i.e. liquidity in "normal" times, is driven by search costs required for a trader to find a willing buyer for an asset he/she is trying to sell or vice versa. Search liquidity is asset specific. Systemic liquidity, i.e. liquidity in "stressed" times, is driven by the homogeneity of investors: the degree to which one's decision to sell is related to the decision to sell made by other market players at the same time. Systemic liquidity is specific to market participants' behaviour. This framework proves fairly powerful in identifying the role of credit derivatives and transparency for liquidity of corporate bond markets. We have applied it to the illiquid segments of the European credit market and found that credit derivatives are likely to improve search liquidity as well as systemic liquidity. However, it is possible that in their popular use today, credit derivatives reinforce a concentration of positions that can worsen systemic liquidity. We also found that post-trade transparency has surprisingly little bearing on liquidity in that where it improves liquidity it is merely acting as a proxy for pre-trade transparency or transparency of holdings. We conclude that if liquidity is the objective, pre-trade transparency, as well as some delayed transparency on net exposures and concentrations, is likely to be more supportive of both search and systemic liquidity than post-trade transparency.
JEL Code
G14 : Financial Economics→General Financial Markets→Information and Market Efficiency, Event Studies, Insider Trading
G15 : Financial Economics→General Financial Markets→International Financial Markets
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
28 June 2007
This report analyses the financial position of non-financial enterprises in the euro area, in particular the amount of external financing, the choice between debt and equity and the composition and maturity structure of debt. It aims at identifying the main features of the euro area, as well as the peculiarities that depend on the country of origin and the sector of activity. Attention is also devoted to assessing whether a country's institutional features are correlated with different financial structures by firms. In light of the particular interest in the access of small and medium-sized enterprises (SMEs) to financing, the report also analyses how financing patterns differ across large, medium-sized and small enterprises. Finally, the report discusses the recent trends observed in the corporate finance landscape of the euro area over the past few years. Although it is still too early to pass final judgement, vast structural changes are underway that could have already influenced in a positive way in the availability of external funds for firms. All in all, a comprehensive understanding of corporate finance in the euro area is important from a monetary policy perspective, given its impact on the transmission mechanism and for productivity and economic growth. Moreover, such an understanding is also relevant from a financial stability perspective. A first assessment is now possible eight years into the third stage of Economic and Monetary Union (EMU), given that sufficient data have been accumulated during this period. This assessment is particularly important as the introduction of the single currency has had significant structural effects on the working of financial markets, increasing their size and liquidity, and fostering cross-border competition. The data available for this report generally cover the period 1995-2005, and the cut-off date for the statistics included is 10 March 2007.
JEL Code
D92 : Microeconomics→Intertemporal Choice→Intertemporal Firm Choice, Investment, Capacity, and Financing
G30 : Financial Economics→Corporate Finance and Governance→General
G10 : Financial Economics→General Financial Markets→General
O16 : Economic Development, Technological Change, and Growth→Economic Development→Financial Markets, Saving and Capital Investment, Corporate Finance and Governance
K40 : Law and Economics→Legal Procedure, the Legal System, and Illegal Behavior→General