Contemporaneous linkages: Funding liquidity and stock market spirals

Abstract

We observe, especially during financial crisis periods, that central bank policies may trigger credit rationing and borrowing cost increases, resulting in contemporaneous institutional lender and market maker funding illiquidity. In turn, funding illiquidity is transmitted through banks and broker/dealers to market illiquidity of individual stocks. Thus, funding illiquidity, often originating with central bank monetary policy, is contemporaneously conveyed through institutional lenders, transferred to broker/dealers and spawns interconnected stock market illiquidity spirals and loss spirals. Our results are consistent and robust across different models that control for endogenous and exogenous factors.

A Hybrid Approach of Wavelet Transform, Convolutional Neural Networks and Gated Recurrent Units for Stock Liquidity Forecasting

“…Their model is evaluated based on MSE which indicates a value of 0.0083 for Qs and 0.0023 for Zr. The author in [6] estimates that the LSTM model is more efficient than the linear regression method and the multilayer perceptron. The results of this study indicate that the LSTM model exhibits better MSEs.…”

“…Moreover, these models are only tested on a small number of observations. The authors in [5] and [6] only tested their model on the basis of 12 and 110 observations respectively, whereas our model is tested on 1053 observations for Qs, 1099 for Amh, and 1095 for Zr. As a result, the MSEs of earlier models are less reliable.…”

“…Yet, it has negative financial and economic consequences. In fact, It increases equity market risk [2], [3], [4], and reduces bank liquidity [5], [6]. Stock liquidity affects financial stability [7], [8].…”