## Market Liquidity Strains Signal Heightened Global Financial Stability Risk

_IMF Blog, October 27, 2022_

## Source details

**Canonical URL:** [Market Liquidity Strains Signal Heightened Global Financial Stability Risk](https://www.imf.org/en/blogs/articles/2022/10/26/market-liquidity-strains-signal-heightened-global-financial-stability-risk)

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## Bibliographic details
- Authors: Fabio Cortes, Glenn Gottselig, Shoko Ikarashi, Aki Yokoyama
- Published: October 27, 2022

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### Chart of the Week / Overview
- Title: Market Liquidity Strains Signal Heightened Global Financial Stability Risk
- Authors: Fabio Cortes, Glenn Gottselig, Shoko Ikarashi, Aki Yokoyama
- Date: October 27, 2022
- Label: Chart of the Week
- Core point: "A deterioration in market liquidity has amplified price swings."

### Definition and significance of liquidity
- Liquidity refers to "how easily assets can be bought or sold—and when it dries up, it can be disruptive."
- Liquidity is described as "a key measure of how well financial markets are working."

### Recent developments and drivers
- After "more than a decade of abundant liquidity and relative calm in markets," central bank interest-rate increases to contain inflation have been accompanied by elevated market volatility.
- Measures of market liquidity "have worsened across asset classes, especially in recent weeks, as heightened uncertainty about the economic outlook and monetary policy left investors with much less risk appetite."

### Financial stability implications
- Worsening liquidity "may pose risks to financial stability," as outlined in the Global Financial Stability Report referenced in the text.
- The piece notes that "sudden price moves combined with forced selling and deleveraging can lead to disorderly conditions in asset markets that could threaten broader market functioning and stability."
- Spillover channel highlighted: "Spillovers from disorderly asset markets could also increase borrowing costs for governments and corporations, worsening financial conditions."

### Illustrative episode
- The stress in the United Kingdom’s government bond market required the Bank of England to intervene.
- This episode is used to underscore how liquidity deterioration can produce market stress and require central bank action.

### Key takeaways
- Market liquidity has deteriorated across asset classes amid rising interest rates and heightened uncertainty.
- Reduced risk appetite has amplified price swings and market volatility.
- Liquidity strains can produce disorderly market conditions via forced selling and deleveraging, with potential spillovers to borrowing costs and broader financial conditions.

*Source: Market Liquidity Strains Signal Heightened Global Financial Stability Risk, Chart of the Week, Fabio Cortes; Glenn Gottselig; Shoko Ikarashi; Aki Yokoyama; October 27, 2022.*

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## References

- [Global Financial Stability Report](https://www.imf.org/en/Publications/GFSR/Issues/2022/10/11/global-financial-stability-report-october-2022)

_Source: https://www.imf.org/en/blogs/articles/2022/10/26/market-liquidity-strains-signal-heightened-global-financial-stability-risk_