Template-Type: ReDIF-Paper 1.0
Author-Name: Peter Csoka
Author-X-Name-First: Peter
Author-X-Name-Last: Csoka
Author-Email: 
Author-Workplace-Name: 

Author-Name: Judit Hever
Author-X-Name-First: Judit
Author-X-Name-Last: Hever
Author-Email: heverj@mnb.hu
Author-Workplace-Name: Magyar Nemzeti Bank

Title: The Effect of Regulatory Requirements and ESG Promotion on Market Liquidity
Abstract: Liquidity and market risk are key considerations in financial markets, especially in times of financial crises. For this reason, regulatory attention to and measures in these fields have been on the rise for the past years. Based on practical experience, regulations aiming at ensuring funding liquidity or, in general, reducing certain risky positions have the side effect of reducing market liquidity. To understand this effect, we extend a standard general equilibrium model with transaction costs of trading, endogenous market liquidity, and the modeling of regulation. We prove that higher regulatory requirements or divesting bad ESG assets reduces market liquidity.
Length: 30 pages
Creation-Date: 2023
File-URL: https://www.mnb.hu/letoltes/mnb-wp-2023-1-final.pdf
File-Format: Application/pdf
Number: 2023/1
Classification-JEL: G11
Keywords: Market liquidity, Market risk, Liquidity risk, General equilibrium model, Regulatory requirement, ESG related asset
Handle: RePEc:mnb:wpaper:2023/1