The Importance of Market Liquidity in Securities Market

Oct 13, 2025 by thesweetdesigns.com 124 views

Introduction

The relationship between market liquidity of securities and the creation of bank liquidity is a crucial aspect of the financial system. In recent years, the banking sector in Indonesia has experienced various changes that are influenced by market factors. This study aims to analyze the effect of stock liquidity, stock returns, stock volatility, and bond liquidity on the creation of bank liquidity in the short and long term. Understanding this relationship is essential for policy makers and practitioners in the banking industry to better comprehend the dynamics that occur in the financial system.

The Importance of Market Liquidity in Securities Market

Market liquidity is a critical factor in the securities market, as it affects the ability of investors to buy and sell securities quickly and at a fair price. In the context of the banking sector, market liquidity is essential for the creation of bank liquidity. Bank liquidity refers to the ability of a bank to meet its short-term obligations, such as paying off deposits and meeting loan demands. The creation of bank liquidity is influenced by various factors, including market liquidity, stock returns, stock volatility, and bond liquidity.

Research Methodology

This study uses a descriptive method with a quantitative approach. The research sample consists of 22 banks selected through the purposive sampling method, in which 15 banks are selected based on the specified criteria. The data used is secondary data obtained from the Yahoo Finance website and ID Investing, collecting relevant time series data for analysis. The analysis method applied is the Vector Error Correction Model (VECM), which allows researchers to evaluate short-term and long-term relationships between the variables studied.

Research Result

The results of this study show that shares liquidity has different impacts in the short and long term. In the short term, stock liquidity has a significant positive influence on the creation of bank liquidity. However, on the contrary, it occurs in the long run, where the liquidity of the stock shows a significant negative effect. This indicates that although stock liquidity supports the creation of liquidity in a short period, in the long run, it can create instability.

Stock Liquidity

Stock liquidity is a critical factor in the securities market, as it affects the ability of investors to buy and sell securities quickly and at a fair price. In the context of the banking sector, stock liquidity is essential for the creation of bank liquidity. The results of this study show that stock liquidity has a significant positive influence on the creation of bank liquidity in the short term. However, in the long run, stock liquidity shows a significant negative effect. This indicates that although stock liquidity supports the creation of liquidity in a short period, in the long run, it can create instability.

Stock Returns

Stock returns do not show a significant effect, both in the short and long term, on the creation of bank liquidity. This may be caused by the nature of return, which is greatly influenced by market conditions and other external factors that are not always directly related to the capacity of the bank in creating liquidity.

Stock Volatility

Stock volatility also shows attractive results. In the short term, stock volatility has a negative and significant effect on the creation of bank liquidity. However, in the long run, volatility actually has a significant positive influence. This phenomenon shows that a more stable market in the short term can increase liquidity, while in the long run, greater fluctuations can cut the advantage of the bank in creating liquidity.

Bond Liquidity

Bond liquidity has a significant negative influence in the short term, but does not show a significant effect in the long run. This may reflect that bonds, as long-term investment instruments, cannot always have a positive effect in unstable market conditions.

Conclusion

This study provides an important insight into the relationship between the liquidity of the securities market and the creation of bank liquidity in Indonesia. This finding can be the basis for policy makers and practitioners in the banking industry to better understand the dynamics that occur in the financial system. More attention is needed to good liquidity management, especially in understanding the long-term influence of market liquidity, to maintain stability and maximize the potential for the creation of bank liquidity.

Implication of the Study

The results of this study have several implications for the banking industry. Firstly, the study highlights the importance of market liquidity in the securities market for the creation of bank liquidity. Secondly, the study shows that stock liquidity has a significant positive influence on the creation of bank liquidity in the short term, but a significant negative effect in the long run. This indicates that banks need to manage their liquidity carefully, taking into account the short-term and long-term effects of market liquidity.

Limitation of the Study

This study has several limitations. Firstly, the study uses a descriptive method with a quantitative approach, which may not capture the complexity of the relationship between market liquidity and the creation of bank liquidity. Secondly, the study uses secondary data obtained from the Yahoo Finance website and ID Investing, which may not be comprehensive or up-to-date.

Future Research Directions

This study provides several directions for future research. Firstly, the study highlights the need for further research on the relationship between market liquidity and the creation of bank liquidity. Secondly, the study suggests that future research should focus on the long-term effects of market liquidity on the creation of bank liquidity. Finally, the study recommends that future research should use more comprehensive and up-to-date data to capture the complexity of the relationship between market liquidity and the creation of bank liquidity.

References

[1] Yahoo Finance. (2023). Yahoo Finance.
[2] ID Investing. (2023). ID Investing.
[3] Vector Error Correction Model (VECM). (2023). Vector Error Correction Model (VECM).

Note: The references provided are fictional and for demonstration purposes only.

Q: What is market liquidity, and how does it affect the creation of bank liquidity?

A: Market liquidity refers to the ability of investors to buy and sell securities quickly and at a fair price. In the context of the banking sector, market liquidity is essential for the creation of bank liquidity. The creation of bank liquidity is influenced by various factors, including market liquidity, stock returns, stock volatility, and bond liquidity.

Q: What is the relationship between stock liquidity and the creation of bank liquidity?

A: The results of this study show that stock liquidity has different impacts in the short and long term. In the short term, stock liquidity has a significant positive influence on the creation of bank liquidity. However, in the long run, stock liquidity shows a significant negative effect. This indicates that although stock liquidity supports the creation of liquidity in a short period, in the long run, it can create instability.

Q: What is the role of stock returns in the creation of bank liquidity?

A: Stock returns do not show a significant effect, both in the short and long term, on the creation of bank liquidity. This may be caused by the nature of return, which is greatly influenced by market conditions and other external factors that are not always directly related to the capacity of the bank in creating liquidity.

Q: How does stock volatility affect the creation of bank liquidity?

A: Stock volatility also shows attractive results. In the short term, stock volatility has a negative and significant effect on the creation of bank liquidity. However, in the long run, volatility actually has a significant positive influence. This phenomenon shows that a more stable market in the short term can increase liquidity, while in the long run, greater fluctuations can cut the advantage of the bank in creating liquidity.

Q: What is the impact of bond liquidity on the creation of bank liquidity?

A: Bond liquidity has a significant negative influence in the short term, but does not show a significant effect in the long run. This may reflect that bonds, as long-term investment instruments, cannot always have a positive effect in unstable market conditions.

Q: What are the implications of this study for the banking industry?

A: The results of this study have several implications for the banking industry. Firstly, the study highlights the importance of market liquidity in the securities market for the creation of bank liquidity. Secondly, the study shows that stock liquidity has a significant positive influence on the creation of bank liquidity in the short term, but a significant negative effect in the long run. This indicates that banks need to manage their liquidity carefully, taking into account the short-term and long-term effects of market liquidity.

Q: What are the limitations of this study?

A: This study has several limitations. Firstly, the study uses a descriptive method with a quantitative approach, which may not capture the complexity of the relationship between market liquidity and the creation of bank liquidity. Secondly, the study uses secondary data obtained from the Yahoo Finance website and ID Investing, which may not be comprehensive or up-to-date.

Q: What are the future research directions based on this study?

A: This study provides several directions for future research. Firstly, the study highlights the need for further research on the relationship between market liquidity and the creation of bank liquidity. Secondly, the study suggests that future research should focus on the long-term effects of market liquidity on the creation of bank liquidity. Finally, the study recommends that future research should use more comprehensive and up-to-date data to capture the complexity of the relationship between market liquidity and the creation of bank liquidity.

Q: What are the policy implications of this study?

A: The results of this study have several policy implications. Firstly, the study highlights the importance of market liquidity in the securities market for the creation of bank liquidity. Secondly, the study shows that stock liquidity has a significant positive influence on the creation of bank liquidity in the short term, but a significant negative effect in the long run. This indicates that policymakers need to take into account the short-term and long-term effects of market liquidity when making decisions about the banking industry.

Q: What are the practical implications of this study for banks?

A: The results of this study have several practical implications for banks. Firstly, the study highlights the importance of market liquidity in the securities market for the creation of bank liquidity. Secondly, the study shows that stock liquidity has a significant positive influence on the creation of bank liquidity in the short term, but a significant negative effect in the long run. This indicates that banks need to manage their liquidity carefully, taking into account the short-term and long-term effects of market liquidity.

Q: What are the future challenges for the banking industry based on this study?

A: The results of this study highlight several future challenges for the banking industry. Firstly, the study shows that market liquidity is essential for the creation of bank liquidity. Secondly, the study highlights the need for banks to manage their liquidity carefully, taking into account the short-term and long-term effects of market liquidity. Finally, the study recommends that banks need to be prepared for the potential negative effects of stock liquidity in the long run.