Bank funding constraints and stock liquidity

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This paper examines the relationship between bank marginal funding constraints and stock liquidity. Using bank credit default swap (CDS) spreads we show that increased funding constraints weaken bank stock liquidity (as measured by liquidity tightness, depth, and resilience). This effect strengthens during crises periods. Deteriorating bank stock liquidity is in turn priced into excess stock returns. In addition, we find that during liquidity crises, monetary expansion can break the relationship between funding costs and stock liquidity. Heightened monetary policy uncertainty, however, strengthens this relation.


  • Funding spread, stock liquidity, idiosyncratic liquidity risk, price of liquidity
Original languageEnglish
Pages (from-to)1-16
JournalEuropean Journal of Finance
Issue number1
Early online date27 Jul 2022
Publication statusPublished - Jan 2023

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