Abstract
This paper investigates the relationship between macrofinancial volatility, derivatives usage, and liquidity preference of nonfinancial firms in the United States. It discusses theoretically how liquidity preference changes under different institutional settings created to deal with macrofinancial risks, and provides exploratory empirical analysis to measure these changes. The preliminary empirical findings suggest that the liquidity preference of nonfinancial firms in the United States, according to a specific metric, declined from the 1950s to the 1980s, but has increased since then, despite the voluminous increase in derivatives transactions since the 1970s. The theoretical discussion and the preliminary evidence lend support to claims supporting financial market regulation and raise doubts about the effectiveness of financial derivatives usage as an effective hedging mechanism.
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