Using a large data set on credit default swaps, we study how default risk interacts with interest-rate risk and liquidity risk to jointly determine the term structure of credit spreads. We classify the reference companies into two broad industry sectors, two broad credit rating classes, and two liquidity groups. We develop a class of dynamic term structure models that include (i) two benchmark ...

The recent financial crisis has shown that liquidity risk is far more important and intricate than regulators had previously acknowledged. The shift from bankbased to market-based financial systems and from deferred net settlement systems to liquidity-demanding real-time gross settlement of payments explains some of the shortcomings of traditional liquidity risk management. Although liquidity r...

The Basel Committee on Banking Supervision (BCBS), in response to the recent financial crisis, has developed new stability rules aimed at preventing financial crises in the future. This paper uses the new Liquidity Ratio (LCR) and attempts to determine the impact of this ratio on the stability of the banking system. The objective of the LCR is to promote the short-term resilience of the liquidi...

This research seeks statistical commonalities in market liquidity across a range of corporate equities and bond markets and commodity futures markets, with an aim to better understanding system-level patterns in aggregate or funding liquidity that arise from broad patterns in market liquidity. We present a Bayesian estimation of hidden Markov chain (HMC) models to measure the latent structure o...

The analysis of macroeconomic variables for current situation in Iran indicates a Conundrum. Solving this puzzle is vital for Central Bank of Iran in order to choose an appropriate approach for monetary policy and banking supervision. Increase in liquidity growth rate, significant decrease of inflation rate and interest rate rigidity are the three sides of this puzzle. This study designs an inn...

This paper studies the pricing of liquidity risk in the cross section of corporate bonds for the period from January 1994 to March 2009. The average return on bonds with high sensitivities to aggregate liquidity exceeds that for bonds with low sensitivities by about 4% annually. The positive relation between expected corporate bond returns and liquidity beta is robust to the effects of default ...

This paper explores the role of liquidity risk in the pricing of corporate bonds. We show that corporate bond returns have significant exposures to fluctuations in treasury bond liquidity and equity market liquidity. Further, this liquidity risk is a priced factor for the expected returns on corporate bonds, and the associated liquidity risk premia help to explain the credit spread puzzle. In t...

Market liquidity has an important role in trading on stock markets, since on illiquid markets the implicit cost of trading can cause notable losses for the investors. Therefore market participants should always measure the liquidity of the markets, which they can carry out in two ways, in a static and in a dynamic form. The most commonly used liquidity measures – bid-ask spread and the turnover...

This paper proposes a new non-parametric method for estimating model-free, time-varying liquidity betas which builds on realized covariance and volatility theory. Working under a liquidityadjusted CAPM framework we provide evidence that liquidity risk is a factor priced in the Greek stock market, mainly arising from the covariation of individual liquidity with local market liquidity, however, t...