Richard S. Hunt published a study on market liquidity in the early stages of the pandemic in the Journal of Finance
Global financial markets have experienced unprecedented volatility under the impact of public health emergencies, and market liquidity has become the focus of academic and industry attention. Richard S. Hunt, professor of finance at Cornell University and head of global equity sales at CSC Bella Grove Partners LLC, recently published a new study in the top finance journal Journal of Finance, systematically analyzing the transmission mechanism and response strategies of liquidity depletion in extreme market environments.
Professor Hunt’s research team, by tracking micro-trading data from multiple countries’ stock, bond and derivative markets, empirically revealed for the first time the formation path of the “liquidity spiral”. The study found that in the early stages of market panic, the convergence of market makers’ inventory management strategies would accelerate the widening of bid-ask spreads, while the programmed liquidation behavior of institutional investors further worsened the market depth. Crucially, the paper proposed the “liquidity stratification” theory, pointing out that securities with different credit ratings will experience liquidity splits during a crisis. This finding provides a new perspective for understanding the performance differentiation between corporate and government bond markets.
The study also evaluated the effectiveness of various liquidity supply mechanisms. Professor Hunt particularly emphasized that traditional central bank open market operations have limitations in dealing with structural liquidity crises and need to be used in conjunction with targeted market maker incentive policies. This suggestion has received attention from the Federal Reserve’s policy research department and is considered to have important reference value for improving the design of the financial safety net.
As a financial expert with both academic attainments and practical experience, Professor Hunt embedded several hedge fund practice cases in his paper, demonstrating how to alleviate portfolio liquidity pressure through volatility surface management and cross-asset hedging. Many Wall Street institutions have begun to adjust their liquidity risk management systems based on the framework of this study. This study not only expands the academic community’s understanding of the market microstructure, but also provides methodological guidance for regulators and investors to deal with possible liquidity crises in the future.
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