Open AccessPosted Content
Market liquidity and funding liquidity
Reads0
Chats0
TLDR
In this article, the authors provide a model that links an asset's market liquidity and traders' funding liquidity, i.e., the ease with which they can obtain funding, to explain the empirically documented features that market liquidity can suddenly dry up, has commonality across securities, is related to volatility, is subject to flight to quality, and comoves with the market.Abstract:
We provide a model that links an asset's market liquidity - i.e., the ease with which it is traded - and traders' funding liquidity - i.e., the ease with which they can obtain funding. Traders provide market liquidity, and their ability to do so depends on their availability of funding. Conversely, traders' funding, i.e., their capital and the margins they are charged, depend on the assets' market liquidity. We show that, under certain conditions, margins are destabilizing and market liquidity and funding liquidity are mutually reinforcing, leading to liquidity spirals. The model explains the empirically documented features that market liquidity (i) can suddenly dry up, (ii) has commonality across securities, (iii) is related to volatility, (iv) is subject to “flight to quality¶, and (v) comoves with the market, and it provides new testable predictions. Keywords: Liquidity Risk Management, Liquidity, Liquidation, Systemic Risk, Leverage, Margins, Haircuts, Value-at-Risk, Counterparty Credit Riskread more
Citations
More filters
Journal ArticleDOI
The Illiquidity Premium: International Evidence
TL;DR: In this article, the authors examined the illiquidity premium in stock markets across 45 countries and found that there is a commonality across countries in the ill-iquidity return premium, controlling for common global return factors and variation in global illiquidities.
Journal ArticleDOI
Regulating Capital Flows to Emerging Markets: An Externality View
Anton Korinek,Anton Korinek +1 more
TL;DR: In this article, the authors provide welfare theoretic foundations for risk-adjusted capital flow regulations based on a standard class of macroeconomic models of financial crises that exhibit financial amplification dynamics, and construct an externality kernel that captures the state-contingent magnitude of systemic externalities of outflows.
Posted Content
Liquidity, Business Cycles, and Monetary Policy
Nobuhiro Kiyotaki,John Moore +1 more
TL;DR: In this article, the authors present a model of a monetary economy where there are differences in liquidity across assets, and examine what role government policy might have through open market operations that change the mix of assets held by the private sector.
Posted Content
Crisis Resolution and Bank Liquidity
TL;DR: In this paper, the effect of financial crises and their resolution on banks' choice of liquid asset holdings is investigated and it is shown that the resulting choice of bank liquidity is counter-cyclical, inefficiently low during economic booms but excessively high during crises.
Journal ArticleDOI
Intermediary leverage cycles and financial stability
Tobias Adrian,Nina Boyarchenko +1 more
TL;DR: In this paper, the authors present a theory of financial intermediary leverage cycles within a dynamic model of the macroeconomy, where risk-based funding constraints that give rise to procyclical leverage.
References
More filters
Posted ContentDOI
Credit Rationing in Markets with Imperfect Information.
Joseph E. Stiglitz,Andrew Weiss +1 more
TL;DR: In this paper, a model is developed to provide the first theoretical justification for true credit rationing in a loan market, where the amount of the loan and amount of collateral demanded affect the behavior and distribution of borrowers, and interest rates serve as screening devices for evaluating risk.
Journal ArticleDOI
Bank Runs, Deposit Insurance, and Liquidity
TL;DR: The authors showed that bank deposit contracts can provide allocations superior to those of exchange markets, offering an explanation of how banks subject to runs can attract deposits, and showed that there are circumstances when government provision of deposit insurance can produce superior contracts.
Book
The econometrics of financial markets
TL;DR: In this paper, Campbell, Lo, and MacKinlay present an attempt by three well-known and well-respected scholars to fill an acknowledged void in the empirical finance literature, a text covering the burgeoning field of empirical finance.
Journal ArticleDOI
Bid, ask and transaction prices in a specialist market with heterogeneously informed traders
TL;DR: The presence of traders with superior information leads to a positive bid-ask spread even when the specialist is risk-neutral and makes zero expected profits as discussed by the authors, and the expectation of the average spread squared times volume is bounded by a number that is independent of insider activity.