This paper proposes a new framework which captures the systemic nature of funding liquidity risk. Using this framework we develop a set of indicators which measure different aspects of the systemic funding liquidity risk in the interbank foreign currency lending market: (i) systemic funding liquidity needs, (ii) systemic vulnerability, (iii) systemic importance and (iv) systemic liquidity short...

We estimate the probability of informed trading (Pi) in an order-driven stock market and perform a comprehensive analysis on the interrelations among Pi and three common performance indicators: liquidity, volatility, and efficiency. We find that uninformed traders exhibit price chasing behavior, and price volatility attracts uninformed traders. Using 3SLS which considers the endogeneity of Pi a...

We study the causal effect of trading on stock market liquidity. We exploit episodes of sensational news (exogenous to the market) that distract retail investors. On “distraction days” we find that trading activity, liquidity, and volatility all decline among stocks owned predominantly by retail investors. These findings, complemented by additional tests, establish that retail investors contrib...

Many classes of microstructure models, as well as intuition, suggest that it should be easier to trade when markets are more active. In the data, however, volume and liquidity seem unrelated over time. This paper offers an explanation for this fact based on a simple frictionless model in which liquidity reflects the average risk-bearing capacity of the economy and volume reflects the changing c...

The industrial organization approach to banking is extended to analyze the effects of interbank market activity and regulatory liquidity requirements on bank behavior. A multi-stage decision situation allows for considering the interaction between credit risk and liquidity risk of banks. This interaction is found to make a risk neutral bank behave as if it were risk averse in an environment whe...

We present a new measure of liquidity known as “latent liquidity” and apply it to a unique corporate bond database. Latent liquidity is defined as the weighted average turnover of investors who hold a bond, where the weights are the fractional investor holdings. It can be used to measure liquidity in markets with sparse transactions data. For bonds that trade frequently, our measure has predict...

This paper investigates the liquidity effect in asset pricing by studying the liquiditypremium relationship of an American Depositary Receipt (ADR) and its underlying share. Using the Amihud (2002) measure, the turnover ratio and trading infrequency as proxies for liquidity, we show that a higher ADR premium is associated with higher ADR liquidity and lower home share liquidity, in terms of cha...

Secondary markets for long-term assets might be illiquid due to adverse selection. In a model in which moral hazard is confined to project initiation, I find that: (1) when agents expect a liquidity dry-up on such markets, they optimally choose to self-insure through the hoarding of non-productive but liquid assets; (2) such a response has negative externalities as it reduces ex-post market par...

The Modern Portfolio Theory was mathematically structured on the basis of risk-return tradeoff: in other words, riskier investment, greater required potential return. Traditional portfolio optimization models, however, implicitly consider that all assets can be traded at any time and quantity, which is unrealistic. aim to propose a two-stage method includes prior classification liquidity based ...

We introduce a post-entry liquidity constraint to the standard model of a …rm with serially correlated pro…tability and an irreversible exit decision. We assume that …rms with no cash holdings and negative cash ‡ow must either exit or raise new cash at a transaction cost. This creates a precautionary motive for holding cash, which must be traded o¤ against the liquidity cost of holding cash. We...