This paper examines the dynamic relationship between credit risk and liquidity in the sovereign bond market in the context of the European Central Bank (ECB) interventions. Using a comprehensive set of liquidity measures obtained from a detailed, quote-level dataset of the largest interdealer market for Italian government bonds, we show that changes in credit risk, as measured by the Italian so...

This paper explores liquidity risk in a system of interconnected financial institutions when these institutions are subject to regulatory solvency constraints and mark their assets to market. When the market’s demand for illiquid assets is less than perfectly elastic, sales by distressed institutions depress the market prices of such assets. Marking to market of the asset book can induce a furt...

The paper shows that turnover proxies for firm-specific uncertainty, not liquidity risk. I show that turnover is unrelated to several alternative measures of liquidity risk and that liquidity risk factors cannot explain why higher turnover predicts lower future returns. I show that, because high turnover firms have high uncertainty, high turnover firms beat the CAPM when aggregate volatility in...

We model a run on a financial market, in which each risk-neutral investor fears having to liquidate shares after a run, but before prices can recover back to fundamental values. To avoid having to possibly liquidate shares at the marginal post-run price—in which case the risk-averse market-making sector will already hold a lot of share inventory and thus be more reluctant to absorb additional s...

We examine the roles of idiosyncratic and systemic funding liquidity risks in bank failures. We estimate a discrete-time hazard model of bank failure using data of U.S. commercial banks between 1985 and 2004, and examine its out-of-sample forecasting performance between 2005 and 2011. The out-of-sample performance comparison shows this model outperforms typical bank failure prediction models. W...

A Mobile Ad hoc Network is a type of ad hoc network. It can change its location configuration dynamically. It is an infrastructure-less network. Due to the complex nature of MANETS, their development processes face several challenges. One of such key challenge is routing. Several routing protocols have already been proposed for MANETs. This paper examines the impact of MAC protocols 802. 11 and...

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...

Modern finance theory is based on the competitive market paradigm (see Duffie 1992, Jarrow and Turnbull 1996). The competitive market paradigm has two implicit assumptions. The first is that security markets are perfectly elastic—that is, traders act as price takers. Price takers believe that they can buy and sell as many shares of a security as they wish without changing the price. The second ...

We investigate the optimal design of bank regulation by developing a tractable general equilibrium model of competitive banks who are exposed to idiosyncratic and aggregate risk. A comparison of the autarkic equilibrium allocations with the efficient allocations reveals that the autarkic economy underinvests in production when aggregate risk is below a threshold, but overinvests in production w...

The paper by Ben Cohen and Eli Remolona provides an excellent summary of the origins of the crisis. I agree with their emphasis on three key factors. There was: (a) fi nancial innovation – with exceptional opacity of new instruments; (b) low interest rates globally, which prompted a search for yield; and (c) an environment of ‘ravenous’ risk appetites driven by problematic incentives in various...