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February 8, 2017

Seminar

Strains on money market makers and money market liquidity

Date

February 8, 2017

Location

Gustav-Schmoller-Raum
DIW Berlin im Quartier 110
Room 3.3.002A
Mohrenstraße 58
10117 Berlin

Speaker

Falko Fecht, Frankfurt School of Finance and Management

We analyze the trading book of a key market maker in the European unsecured money market and study the extent to which liquidity risks accumulated by this market maker affect his pricing of liquidity and the bid/ask spread he quotes on unsecured borrowing and lending. We find that the larger the funding liquidity risk he assumed, the higher is the price he quotes for liquidity. Furthermore, his bid-ask spread increases as his accumulated liquidity risk rises. These findings show that the distribution of liquidity risks within the banking sector matters for the pricing and liquidity in the unsecured money market.

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