Developments in financial market liquidity

In recent years, financial market participants have become increasingly worried that the level and resilience of financial market liquidity has declined significantly, raising concerns over the efficiency of markets and increased the risks associated with a liquidity shock. This article reviews international research on the topic, and generally finds evidence for a decline in the level and resilience of liquidity, although it has been mixed across markets. We also assess liquidity conditions in the New Zealand government bond, funding and short-term money markets using common analytical measures of liquidity as well as drawing on discussions with numerous market participants. We find that liquidity has declined to varying degrees across the different markets, and while risks of a liquidity shock have risen, the decline has been manageable thus far. Section 1 of this article defines what liquidity is, section 2 discusses the global trends in liquidity, and section 3 examines liquidity conditions in New Zealand markets. Section 4 concludes.