Financial crises

Liquidity Runs

Despite mixed evidence, concerns about a decline of bond market liquidity persist. The typical worry is that a sudden decline in bond demand will cause prices to plunge and have serious knock-on effects.

Naturally, the issue merits attention: episodes in which market liquidity disappears rapidly can be disruptive (witness the flash crashes and flash rallies in various equity and bond markets in recent years). However, these incidents tend to be fleeting. Instead, from the perspective of financial stability, funding liquidity is the greater source of vulnerability...

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