Before the crisis, bank regulation relied to a large extent on capital regulation. Liquidity regulation was not widely used. The liquidity problems during the crisis led to calls for liquidity regulation. As a result, the Basel III accord introduced global liquidity standards. An important issue in the construction of such liquidity regulations is the exact nature of the problem they are trying...

• This paper investigates the distribution characteristics of stock market liquidity. • This paper utilizes the GAMLSS model and high-frequency data from Chinese stock markets. • The mean and variance of stock market liquidity move in the opposite directions. • The stock market liquidity normally exhibits a positive skewness. • The stock market liquidity exhibits a normal distribution at a low ...

In investigating the effects of algorithmic trading on stock market liquidity and commonality in liquidity in different market conditions in an electronic limit order market, we find algorithmic trading increases stock liquidity by narrowing quoted and effective bid–ask spreads. Furthermore, algorithmic trading decreases commonality in liquidity; this finding is robust across a variety of liqui...

The traditional Value at Risk (VaR) is a very popular tool measuring market risk, but it does not incorporate liquidity risk. This paper proposes an extended VaR model to integrate liquidity risk for intraday trading strategies using high frequency order book data. We estimate the one step ahead liquidity adjusted intraday VaR called(LAIVaR) for both bid and ask positions, considering several t...

The current financial turmoil has generated considerable discussion of liquidity. Moreover, it has been widely reported that the Federal Reserve played a major role in supplying liquidity to financial markets during this distressed time. This article describes two ways in which the Fed has supplied liquidity since late 2007. The first is traditional: The Fed supplies liquidity by providing cred...

We study the relation between the liquidity of the firm’s assets and the liquidity of financial claims on the assets, thereby linking corporate finance decisions to stock liquidity. Our model highlights an ambiguous relationship. While greater asset liquidity reduces uncertainty regarding valuation of assets-in-place, it increases future investments and the associated uncertainty. The model sho...

The paper investigates whether liquidity constraints affect firm size and growth dynamics using a large longitudinal sample of Italian manufacturing firms. We run standard panel-data Gibrat regressions, suitably expanded to take into account liquidity constraints (proxied by cash flow scaled by firm sales). Moreover, we characterize the statistical properties of firms size, growth, age, and (sc...

This paper presents a real business cycle model with search frictions in the asset market, where equity liquidity is endogenously determined. I use the model to study how labor input, asset liquidity and asset prices fluctuate in response to productivity and liquidity shocks, and how, in turn, these fluctuations magnify the impact of productivity shocks on economic activity. A household’s inves...

Managing price risk with futures contracts creates liquidity risk through marking to market. Liquidity risk matters in an imperfect capital market where interim losses on a futures position have to be financed at a borrowing rate that is higher than the risk-free rate. However, the impact of liquidity risk can be mitigated using options on futures. This paper analyzes the optimal risk managemen...