Liquidity Risk and Funding Cost

Abstract We propose and test a new channel that links liquidity risk interest rates in short-term funding markets. Unlike existing theories focus on premiums demanded by lenders, the postulates borrowers are more exposed to urgent needs willing pay markup for immediate funding. quantify using unique trade-by-trade data uncover systematic differences across individual banks’ cost driven risk. These persistent over decade, suggesting is relevant general not only arises during crisis times.