Money provides liquidity services through a cash-in-advance constraint. The exchange of commodities and assets extends over an infinite horizon under uncertainty and a complete asset market. Monetary policy sets the path of rates of interest and accommodates the demand for balances. Competitive equilibria exist. But, for a fixed path of rates of interest, there is a non-trivial multiplicity of ...

We develop a model predicting two channels through which creditor protection affects stock prices: (1) the probability of a liquidity crisis leading to a binding investment-finance constraint falls with better creditor protection; (2) the stock prices under the investment-constrained regime increase with better creditor protection. We find evidence for both predictions using data on stock marke...

We consider nonlinear stochastic programming problems with probabilistic constraints. The concept of a p-efficient point of a probability distribution is used to derive equivalent problem formulations, and necessary and sufficient optimality conditions. We analyze the dual functional and its subdifferential. Two numerical methods are developed based on approximations of the p-efficient frontier...

A model is presented where universities competitively supply education to mobile students. Students are subject to a liquidity constraint so that tuition must be paid out of pre-university income. It is shown that student loans provided by home jurisdictions will ensure an efficient quality of higher education if loans do not contain any subsidy. If there is income-related debt relief, however,...

The Determinants of Liquidity in the Corporate Bond Markets: An Application of Latent Liquidity We present a new measure of liquidity known as “latent liquidity” and apply it to a unique corporate bond database to discern the characteristics of bonds that lead to higher liquidity. Unlike conventional measures of liquidity, such as trading volume and bid-ask spreads, our measure of liquidity doe...

We provide a model that links a security’s market liquidity — i.e., the ease of trading it — and traders’ funding liquidity — i.e., their availability of funds. Traders provide market liquidity and their ability to do so depends on their funding, that is, their capital and the margins charged by their financiers. In times of crisis, reductions in market liquidity and funding liquidity are mutua...

On the basis of a liquidity management model, liquidity risks, defined as the probability of payment failures in a real-time gross settlement (RTGS) payment system, may either stem from liquidity management inefficiencies or insufficient cash balances. I will show that penalties charged on the amount of payment failures minimise liquidity risks without interfering with the bank’s technology pre...

We investigate numerical aspects of a portfolio selection problem studied in [10], in which we suggest a model of liquidity risk and price impact and formulate the problem as an impulse control problem under state constraint. We show that our impulse control problem could be reduced to an iterative sequence of optimal stopping problems. Given the dimension of our problem and the complexity of i...

In this paper, the sustainability of public debt is interpreted as the result of the interaction of fiscal policy with the economic environment, and not as a statistical concept as in most of the recent literature. If debt must not explode over time, policy makers have to respond to the changing conditions in the macroeconomic environment. This paper defines the conditions which will ensure com...

We propose a multiperiod model in which competitive arbitrageurs exploit discrepancies between the prices of two identical risky assets traded in segmented markets. Arbitrageurs need to collateralize separately their positions in each asset, and this implies a financial constraint limiting positions as a function of wealth. In our model, arbitrage activity benefits all investors because arbitra...