The Overnight Bank Pledged Repo: An Empirical Study Of Liquidity In The Market

The Interbank pledged repo market plays an important role in the whole financial system. Through market transactions, financial institutions adjust and allocate their funds, market interest rate is determined, monetary policies are operated; meanwhile,1-day pledged repo, the main trading products of the interbank repo market, becomes the largest trading value financial product in China’s financial market. In recent years, because of the inside and outside factors, the interbank1-day pledged repo market liquidity always becomes tight suddenly, which may be a potential threat for China’s financial system. However, the research on the interbank1-day pledged repo market liquidity is still in blank.At first, this paper analyzes current achievements on the definition, measurement methods and influence factors of liquidity, gives a clear definition of interbank1-day pledged repo market liquidity. By using minutes transaction data from2010January to2011July and daily transaction data from2003April to2011December, this paper describes the four-dimensional characteristic of interbank1-day pledged repo market liquidity, constructs a new composite index of the market liquidity, discusses the situation and influencing factors of market liquidity, then puts forward policy suggestions. By theoretical and empirical study, this paper comes to following main conclusions:(1)From2010to2011, the market liquidity of the interbank1-day pledged repo market fall after a rise;(2) From2003to2011, the liquidity status of the interbank1-day pledged repo market changed keeping pace with China’s macroeconomic liquidity and monetary policy cycle;(3)Macro monetary conditions are the main factors influencing the interbank1-day pledged repo market liquidity;(4)Reserve rate policy may only take effect on market liquidity, and its impact usually reflects in short-term;(4)The higher degree of market concentration, the poorer the market liquidity;(5)The market expectation of the interbank1-day pledged repo market is asymmetric in monetary expansion and monetary contraction stages, it mainly performs as a positive reinforcement of market liquidity.