Showing papers on "Liquidity risk published in 2021"
TL;DR: In this article, the authors examined the impact of the ongoing Covid-19 pandemic on the global banking stability and assessed any potential recovery signals, and found that the Covid19 outbreak has had detrimental impacts on financial performance across various indicators of financial performance (i.e., accounting-based and market-based performance measures) and financial stability.
116 citations
TL;DR: In this article, the authors investigate the importance of digital financial inclusion, utilizing information and communications technology (DFI-ICT) techniques to promote sustainable growth via economic stability, and the experimental result shows that the classification risk level ratio is achieved to 18.9%, and the error rate of classification of the model is checked.
Abstract: Financial risk is unintended to lose money on an enterprise or investment. Credit risk, Liquidity risk, and operational risk are some more prevalent and unique financial concerns. This is a form of risk that can lead to a capital loss for stakeholders. Building a company from the bottom up is expensive. Any firm may need to go for cash outside to develop at some time in their lives. Financial hazards occur and influence almost every person in various forms and sizes. Digital Financial Services are financial services that rely on customer distribution and the use of digital technologies. While digital financial inclusion (DFI) is important in stimulating economic growth, there is only relatively little empirical data. But whether digital finance is the solution both the bad and the good results of financial inclusion raise. This essay will investigate the importance of digital financial inclusion, utilizing information and communications technology (DFI-ICT) techniques to promote sustainable growth via economic stability. Fast digital technology is currently being used to deliver financial services considerably reduced cost, thereby enhancing financial inclusion and allowing large-scale economic productivity improvements. Although there has been a broad-ranging mention of the benefits of digital finance—financial services offered through mobile telephones, the internet, or cards—we try to measure the size of the economic effect. The experimental result shows that the classification risk level ratio is achieved to 18.9%, and the error rate of classification of the model is checked.
72 citations
TL;DR: A supply chain theory of (recourse/non-recourse) factoring and reverse factoring shows when these post-shipment financing schemes should be adopted and who really benefits from the adoption, and finds that recourse factoring is preferred when the supplier’s credit rating is relatively high, whereas non-recourses are preferred within certain medium range of ratings.
Abstract: Factoring is a financial arrangement where the supplier sells accounts receivable to the factor against a premium and receives cash for immediate working capital needs. Reverse factoring takes adva...
42 citations
TL;DR: In this paper, the authors estimate the liquidity multiplier of an interbank network and banks' contributions to systemic risk using a structural model and show that network topology explains cross-sectional heterogeneity in banks' systemic risk contributions while changes in the equilibrium type drive time series variation.
31 citations
TL;DR: In this article, the authors analyzed the relationship between the idiosyncratic volatility of market liquidity and the returns of the five largest cryptocurrencies by market capitalization and found that the correlation between liquidity volatility and returns is overall significantly positive, but highly time-varying This implies that investors demand a premium for a high variation in liquidity volatility.
30 citations
TL;DR: In this article, the authors study the severity of liquidity constraints in the U.S. housing market using a lifecycle model with uninsurable idiosyncratic risks in which houses are illiquid, but agents have the option to refinance their long-term mortgages or extract home equity.
Abstract: We study the severity of liquidity constraints in the U.S. housing market using a lifecycle model with uninsurable idiosyncratic risks in which houses are illiquid, but agents have the option to refinance their long-term mortgages or extract home equity. The model reproduces well the distribution of individual-level balance sheets – the fraction of housing, mortgage debt and liquid assets in a household’s wealth, the fraction of hand-to-mouth homeowners (Kaplan and Violante, 2014), as the well as the frequency of housing turnover and home equity extraction in the 2001 data. The model implies that 75% of homeowners are liquidity constrained and willing to pay an average of 9 cents to extract an additional dollar of liquidity from their home. Liquidity constraints imply sizable welfare losses that amount to a 1.2% permanent drop in consumption, despite the relatively high frequency of home equity extraction observed in the data.
29 citations
TL;DR: In this article, the authors explored the correlation between firm risk and capital structure using datasets from the sugar and cement sectors of Pakistan as a developing economy, and found that credit risk and liquidity risk are significantly correlated with leverage.
Abstract: The role of risk assessment and capital structure is vital for the sustainable growth of firms and increasing the shareholders’ wealth. This research explores the correlation between firm risk and capital structure using datasets from the sugar and cement sectors of Pakistan as a developing economy. This study is unique as it involved two firms of different nature (sugar firms operate seasonally while cement firms operate yearly) to view the real picture on the impact of risk and structure assessment on firms’ credibility and shareholders’ wealth. For this purpose, 15-year data (2000–2014) containing the financial statements of the target sectors were collected and the ANOVA analysis was applied with credit risk, liquidity risk, systematic risk, and firm size were used as the regressor variables, firm growth and dividend payout ratio as the control variables, and leverage as the regression variable. The findings showed that credit risk and liquidity risk are significantly correlated with leverage. This suggests that decision-makers pertaining to firms’ risk and efficiency must focus more on risk to pursue a stronger and sustainable increase in shareholder wealth.
29 citations
TL;DR: In this article, the authors determine whether the growth in COVID-19 affected index prices by examining equity markets in five regional epicentres, along with a ‘global’ index.
28 citations
TL;DR: In this paper, the authors present a model in which sellers can signal the quality of an asset both by retaining a fraction of the asset and by choosing the liquidity of the market in which they search for buyers.
Abstract: I present a model in which sellers can signal the quality of an asset both by retaining a fraction of the asset and by choosing the liquidity of the market in which they search for buyers. Although these signals may seem interchangeable, I present two settings which show they are not. In the rst setting, sellers have private information regarding only asset quality, and I show that liquidity dominates retention as a signal in equilibrium. In the second setting, both asset quality and seller impatience are privately known, and I show that both retention and liquidity operate simultaneously to fully separate the two dimensions of private information. Contrary to received theory, the fully separating equilibrium of the second setting may contain regions where market liquidity is increasing in asset quality. Finally, I show that if sellers design an assetbacked security before receiving private information regarding its quality, then the optimality of standard debt is robust to the paper’s various settings.
26 citations
TL;DR: In this article, the role of market uncertainty as a market-based determinant of positive average abnormal announcement returns, while including governance, liquidity risk and firm related control variables, was investigated.
21 citations
TL;DR: In this article, the authors examined bank-specific and external factors that affect the liquidity risk in commercial banks in Bangladesh and concluded that although several factors are found insignificant yet have positive/negative relation, the banks must carefully evaluate the factors to avoid a future liquidity crisis.
Abstract: The study examines the bank-specific and external factors that affect the liquidity risk in commercial banks in Bangladesh. The study has been conducted using 23 banks data from 2005-2018, and panel data is used to conduct the regression analysis. Among the bank-specific factors, asset size has a negative relationship with liquidity risk. The larger the bank size, the better the liquidity position and the lower the liquidity risk. Return on equity and capital adequacy ratio has a positive but insignificant relationship with the liquidity risks. In the case of macroeconomic factors, inflation negatively affects the liquidity risks, whereas GDP and domestic credit positively affect. Private and public sector credits increase the investments, which in turn fuel GDP growth. Growth in domestic credit reduces liquidity and may create insolvency. The loan outstanding to asset ratio is positively related to the liquidity risk of the banks. Banks usually increase the loan/advance disbursement to increase profitability, which dries out liquidity and enhances liquidity risk. The study concludes that although several factors are found insignificant yet have positive/negative relation, the banks must carefully evaluate the factors to avoid a future liquidity crisis.
TL;DR: In this paper, the authors study the crash of bank stock prices during the COVID-19 pandemic and find evidence consistent with a "credit line drawdown channel" and conclude that bank provision of credit lines appears akin to writing deep out-of-the-money put options on aggregate risk.
Abstract: We study the crash of bank stock prices during the COVID-19 pandemic. We find evidence consistent with a “credit line drawdown channel”. Stock prices of banks with large ex-ante exposures to undrawn credit lines as well as large ex-post gross drawdowns decline more. The effect is attenuated for banks with higher capital buffers. These banks reduce term loan lending, even after policy measures were implemented. We conclude that bank provision of credit lines appears akin to writing deep out-of-the-money put options on aggregate risk; we show how the resulting contingent leverage and stock return exposure can be incorporated tractably into bank capital stress tests.
TL;DR: In this paper, the authors model competition for liquidity provision between high-frequency traders (HFTs) and slower execution algorithms (EAs) designed to minimize investors' transaction costs, and show that HFTs dominate liquidity provision if the bid-ask spread is binding at one tick.
TL;DR: In this article, the effect of financial flexibility on the enterprise performance of Taiwan's manufacturing industry during the COVID-19 pandemic was explored and data for the first and second quarter of 2020 from companies listed on the Taiwan Stock Exchange were collected and analyzed.
Abstract: Financial flexibility refers to the ability of a firm to respond effectively to unanticipated shocks to its cash flows or its investment opportunities and is a key factor in the sustainable development of enterprise. This article explores the effect of financial flexibility on the enterprise performance of Taiwan’s manufacturing industry during the COVID-19 pandemic. Data for the first and second quarter of 2020 from companies listed on the Taiwan Stock Exchange were collected and analyzed. The results indicate that for listed manufacturing companies on the Taiwan Stock Exchange, financial flexibility has a significant and positive effect on enterprise performance (return on assets, ROA), particularly in the asset-heavy manufacturing industry. However, financial flexibility has no significant effect on the enterprise performance of the asset-light manufacturing industry or the semiconductor industry. This study also show evidence that Taiwan’s asset-light manufacturing industry suffered the most from the COVID-19 crisis, which is not conducive to its sustainable development. In summary, the results show that Taiwan’s manufacturing industry has poor financial flexibility and one of the worst ROA during the COVID-19 pandemic. Based on the results of this research, effective suggestions to rationally retain financial flexibility and pay more attention to liquidity risk management for sustainable development are proposed for Taiwan’s manufacturing industry.
TL;DR: This paper showed that during calm market conditions, corporate bond mutual funds tend to reduce liquid asset holdings to meet redemptions, temporarily increasing relative exposures to illiquid asset classes, and when aggregate uncertainty rises, they tend to scale down their liquid and illiquid assets proportionally to preserve portfolio liquidity, which leads to more corporate bond selling during high-uncertainty periods, which generates price pressures and predicts strong return reversals.
Abstract: How do corporate bond mutual funds manage liquidity to meet investor redemptions? We show that during tranquil market conditions, these funds tend to reduce liquid asset holdings to meet redemptions, temporarily increasing relative exposures to illiquid asset classes. When aggregate uncertainty rises, however, they tend to scale down their liquid and illiquid assets proportionally to preserve portfolio liquidity. This fund-level dynamic management of liquidity appears to affect the broad financial market: Redemptions from the corporate bond fund sector lead to more corporate bond selling during high-uncertainty periods, which generates price pressures and predicts strong return reversals.
TL;DR: With the help of United States Government and committed funding from bank credit lines, the United States corporate sector responded to the Covid-19 cash flow shock by issuing long-term debt to increase cash holdings.
Abstract: With the help of the United States Government and committed funding from bank credit lines, the United States corporate sector responded to the Covid-19 cash flow shock by issuing long-term debt to increase cash holdings I use a case study, evidence from recent research, and a theoretical model to explain the logic behind the changes in corporate financial policy that happened during 2020, and to discuss the importance of United States Government policies to support the market for long-term debt I also point to open research questions about liquidity management, in particular questions that were highlighted by how companies reacted to the Covid-19 pandemic
TL;DR: In this article, the authors explore the determinants of cash holdings of firms in emerging countries using panel data models and show that highly liquid firms have larger size, lower capital expenditure, R&D, net working capital, leverage, and intangible assets.
TL;DR: The spread of COVID-19, containment measures, and general uncertainty led to a sharp reduction in activity in the first half of 2020 as mentioned in this paper, and Europe was hit particularly hard.
Abstract: The spread of COVID-19, containment measures, and general uncertainty led to a sharp reduction in activity in the first half of 2020. Europe was hit particularly hard—the economic contraction in 2020 is estimated to have been among the largest in the world—with potentially severe repercussions on its nonfinancial corporations. A wave of corporate bankruptcies would generate mass unemployment, and a loss of productive capacity and firm-specific human capital. With many SMEs in Europe relying primarily on the banking sector for external finance, stress in the corporate sector could easily translate into pressures in the banking system (Aiyar et al., forthcoming).
TL;DR: This article showed that during the subprime crisis of 2007-09, liquidity risk reduced a bank's survival probability, ROA, and net interest margin, and increased its loan-loss-provision expenses.
20 Feb 2021
TL;DR: In this paper, the authors investigated the country-level determinants of liquidity synchronization and degrees of liquidity synchrony during economic growth volatility in seven Asian emerging markets: Bangladesh, China, India, Indonesia, Malaysia, Pakistan and the Philippines.
Abstract: This study investigates the country-level determinants of liquidity synchronization and degrees of liquidity synchronization during economic growth volatility. As a non-diversifiable risk factor, liquidity co-movement shock spreads market-wide and thus disrupts the overall functioning of the financial market. Firms in Asian markets operate in legal and regulatory environments distinct from those of firms analyzed in the previous literature. Comprehensive analyses of liquidity synchronicity in emerging markets are limited. A major knowledge gap pertaining to Asian emerging markets serves as the primary motivation for this study. Seven Asian emerging economies are selected from the MSCI emerging market index: Bangladesh, China, India, Indonesia, Malaysia, Pakistan and the Philippines for analysis from 2010 to 2019. The empirical findings show high levels of liquidity synchronicity in weaker economic and financial environments with low GDP growth, high inflation and interest rates and underdeveloped financial systems taking the form of low levels of private credit. Liquidity synchronicity is also affected by poor investor protection, political instability, weak rule of law and government ineffectiveness. Moreover, levels of liquidity synchronicity are higher in a period of economic growth volatility.
TL;DR: In this paper, the authors investigated the impact of corporate governance and other related factors on the risk-taking of Islamic banks by using the two step system generalized method of moment (2SYS-GMM) estimation technique by using a panel data set of 129 Islamic banks from 29 countries in the Middle East, South Asia and Southeast Asia regions covering from 2008 to 2017.
Abstract: This paper aims to investigate the impact of corporate governance and other related factors on the risk-taking of Islamic banks. Risk-taking is defined according to credit risk, liquidity risk and operational risk.,The study uses the two step system generalized method of moment (2SYS-GMM) estimation technique by using a panel data set of 129 Islamic banks (IBs) from 29 countries in the Middle East, South Asia and the Southeast Asia regions covering from 2008 to 2017. Governance variables incorporated include board size, board independence, chief executive officer (CEO) power, Shariah board and audit committee, as well as other control variables.,This study provides evidence that board size and Shariah board are positively and significantly related to credit and liquidity risk. Board independence and CEO power are negative and significantly associated with credit and liquidity risk, but the audit committee has a mixed relationship with bank risk. Male CEOs take more risk compared to the female and more board meeting has an inverse relationship with Islamic banks risk. Bank size, however, does not influence the level of risk in Islamic banks, but leverage has an inverse relationship with bank risk.,The present study sheds light on the risk-taking behaviour of the board of IBs, particularly the board independence and CEO power reducing the level of risk in IBs thereby contributing to the agency theory. Therefore, regulators and policymakers can use the findings of this study to strengthen the internal corporate governance mechanism to protect IBs at a time of financial distress. Moreover, it increases the trust of the shareholders and stakeholders in the effectiveness of governance reforms that have been pursued to reap long-term benefits.,To the best of the knowledge, this research is preliminary in examining the board behaviour on risk-taking of IBs from four different regions. The results are robust and suggest that the board of directors mitigate the level of risk in IBs.
TL;DR: This article study the effects of FX liquidity risk on carry trade returns using a novel low-frequency market-wide liquidity measure and show conclusively that the vast majority of variation in carry trade return can be explained by two risk factors (liquidity risk and market risk) and further corroborated when the mimicking liquidity risk factor is replaced with a non-tradable innovations risk factor.
TL;DR: Turnover premia in China's stock markets can be explained mainly by both liquidity risk and firm-specific uncertainty as discussed by the authors, which is the return on buying low turnover stocks and shorting high turnover stocks.
Abstract: This paper explores turnover premia in China's stock markets. There is a negative cross-sectional relation between turnover and average realized returns. Turnover premia, which is the return on buying low turnover stocks and shorting high turnover stocks, can reach 34% per annum. In effect, turnover in China's stock markets can be explained mainly by both liquidity risk and firm-specific uncertainty. Turnover premia are more pronounced for firms with higher cash flow risk, an indicator of firm-specific uncertainty. Cash flow risk could also amplify the turnover premia of option-like firms.
TL;DR: In this paper, the joint impacts of profitability and industry environment on several types of risk (including credit risk, liquidity risk, capital risk, and inso... ) are tested.
Abstract: This study contributes to the banking literature by testing the joint impacts of profitability and industry environment on several types of risk (credit risk, liquidity risk, capital risk, and inso...
TL;DR: This article examined the relation between employee protection legislation and corporate cash holdings and found that increased labor adjustment costs increase a firm's operating leverage making firms to adjust their liquidity management by increasing precautionary savings.
TL;DR: In this article, the authors developed a liquidity-based asset pricing model featuring investors with heterogeneous investment horizons and stochastic transaction costs, which reduces the importance of liquidity risk relative to the standard CAPM market risk and generates a more complex expectation of expected liquidity.
Abstract: We develop a liquidity-based asset pricing model featuring investors with heterogeneous investment horizons and stochastic transaction costs. In an equilibrium where all investors invest in all assets (integration), we nd that the existence of investors with heterogeneous horizons, as opposed to homogeneous horizons, reduces the importance of liquidity risk relative to the standard CAPM market risk and generates a more complex eect of expected liquidity. In an equilibrium where short-term investors do not invest in some more illiquid assets (partial segmentation), our model generates an additional segmentation premium for these assets. We estimate the model for the cross-section of U.S. stocks using GMM and nd that our heterogeneous-horizon asset pricing model fares better than a standard liquidity-adjusted CAPM. The segmented version of our model delivers the best cross-sectional t and generates a substantial eect of expected liquidity on ex
TL;DR: In this article, the authors exploit a Sharia-compliant levy in Pakistan, which generates unintended and quasi-experimental variation in liquidity risk, with data from the credit registry and firm imports.
Abstract:
Banks in low-income countries face severe liquidity risk due to volatile deposits, which destabilize their funding, and dysfunctional liquidity markets, which induce expensive interbank and central bank lending. Such liquidity risk dissuades the transformation of short-term deposits into long-term loans and deters long-term investment. To validate this mechanism, we exploit a Sharia-compliant levy in Pakistan, which generates unintended and quasi-experimental variation in liquidity risk, with data from the credit registry and firm imports. We find that banks with a stronger exposure to liquidity risk lower their supply of long-term finance, which reduces the long-term investment of connected firms.
TL;DR: In this article, the authors explored the effect of FF on enterprise risk-taking within Taiwan's semiconductor industry amid the COVID-19 pandemic period, and investigated whether ERT varies with semiconductors' industry characteristic.
Abstract: Research background: Risk-taking is the basis for sustainable development of enterprise. It was clear that the influence COVID-19 epidemic on the global market economy has increased operational risks for businesses. The semiconductor industry has high operating risks and financial risks. Moderate financial flexibility (FF) can improve the ability of semiconductor enterprises to acquire financial resources in real time, calmly cope with the impact of uncertainties in operation, improve investment opportunities, and enhance sustainable operation. It is therefore interesting to study the influence of FF on enterprise risk-taking (ERT). Purpose of the article: The aim of the contribution is to explore the effect of FF on ERT within Taiwan’s semiconductor industry amid the COVID-19 pandemic period, and investigate whether ERT varies with semiconductor industry characteristic. Methods: Data from first three quarters of 2020, from multinational semiconductor firms listed on the Taiwan Stock Exchange (TSE), were collected and analyzed. Fixed effects regression with heteroscedasticity adjustment used to evaluate the influence of FF on the ERT of Taiwan’s semiconductor industry. Furthermore, in order to corroborate and support the reliability of the results, this research also used the different measures of ERT and Quantile regression (median regression) in the research model to check the robustness. Findings & value added: Empirical results indicate that FF has a U-shaped effect on ERT for multinational semiconductor firms listed on the TSE, particularly within the integrated circuits (IC) manufacturing industry. Additionally, FF also has a U-shaped effect on ERT for the asset-light semiconductor and IC manufacturing industries. This article also suggests that for the asset-light semiconductor and IC manufacturing industries, the optimal inflection points are 1.1397 and 0.9729, respectively. Based on the consequences of this study, it is suggested that Taiwan’s semiconductor industry should reasonably maintain FF and focus on the liquidity risk management for the long term value added, even after the COVID-19 pandemic period. © 2021 Nicolaus Copernicus University. All rights reserved.
TL;DR: In this article, the authors test and find supporting evidence for the precautionary motive hypothesis of liquidity hoarding for U.S. commercial banks during the recent financial crisis and find that banks held more liquid assets in anticipation of future losses from securities write-downs.
Abstract: I test and find supporting evidence for the precautionary motive hypothesis of liquidity hoarding for U.S. commercial banks during the recent financial crisis. I find that banks held more liquid assets in anticipation of future losses from securities write-downs. Exposure to securities losses in their investment portfolios and expected loan losses (measured by loan loss reserves) represent key measures of banks’ on-balance sheet risks, in addition to off-balance sheet liquidity risk stemming from unused loan commitments. Furthermore, unrealized securities losses and loan loss reserves seem to better capture the risks stemming from banks’ asset management and provide supporting evidence for the precautionary nature of liquidity hoarding. Moreover, I find that more than one-fourth of the reduction in bank lending during the crisis is due to the precautionary motive. JEL Classification: G01, G21.