Work

The effect of regulatory requirements on market liquidity: ESG promotion as a special case

Year: 2025

Type: article

Abstract: Liquidity is a key consideration in financial markets, especially in times of financial crises. For this reason, regulatory attention to and measures in this field have been on the rise for the past several years. As a matter of fact, regulations aiming at ensuring funding liquidity or, in general, reducing certain risky positions have the side effect of reducing market liquidity. To understand this effect, we extend a standard general equilibrium model with transaction costs of trading, endogenous market liquidity, and the modeling of regulation. We prove that both funding liquidity regulation in general and divesting bad ESG assets, in particular, reduce market liquidity.

Source: International Review of Economics & Finance

DOI: 10.1016/j.iref.2025.104078

Authors: Judit Hevér, Péter Csóka

Institutions: Corvinus University of Budapest, ELTE Centre for Economic and Regional Studies

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: gold

Estimated APC paid: $1,930

Funders: Magyar Tudományos Akadémia, Nemzeti Kutatási Fejlesztési és Innovációs Hivatal, National Research, Development and Innovation Office