Funding liquidity and market liquidity in government bonds

Prachi Deuskar, Timothy C. Johnson

Research output: Contribution to journalArticlepeer-review


Using a comprehensive dataset of orders and trades in the Indian government bond market, this study presents new evidence on the effect of funding liquidity on market liquidity. We find no evidence that lower short-term interest rates – the key instruments of monetary policy – boost market liquidity. However, consistent with models that stress the role of intermediary capital, we find that market liquidity measures have a strong, positive association with short-term borrowing by primary dealers. We provide additional evidence linking these firms’ borrowing to their balance sheet strength and secondary market participation. The results suggest that localized funding conditions specific to marginal suppliers of intermediation services are more important for market liquidity than the broader economy-wide funding environment.

Original languageEnglish (US)
Article number106165
JournalJournal of Banking and Finance
StatePublished - Aug 2021


  • Funding liquidity
  • Government bonds
  • Intermediary capital
  • Market liquidity

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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