New model reveals how market liquidity can spiral out of control
The article explains how the ease of trading an asset (market liquidity) is connected to how easily traders can get funding (funding liquidity). Traders need funding to provide market liquidity, and the assets' market liquidity affects how much funding traders need. When margins are unstable, market and funding liquidity can create a cycle of instability. The model also predicts that speculators' capital influences market liquidity and risk premiums.