Illiquidity, Monetary Conditions, and the Financial Crisis in the United Kingdom

The recent financial crisis stressed the significance of liquidity for stock markets, indicating the importance of understanding the relationship between liquidity and monetary policies. We apply Jensen and Moorman’s (2010) framework on the UK stock market. Our results support the claim that market liquidity and individual-stock pricing due to illiquidity are both affected by monetary conditions, justifying the intervention of central banks when required but the two react differently toward Bank of England base rate and London Interbank Offered Rate (LIBOR). Furthermore, it was shown that the financial crisis had a detrimental effect, particularly on market liquidity. Nevertheless, compared to Jensen and Moorman (2010), our overall results are weaker probably due to the lower volatility in the UK market relative to the US market.