The industrial organization approach to banking is extended to analyze the effects of interbank market activity and regulatory liquidity requirements on bank behavior. A multi-stage decision situation allows for considering the interaction between credit risk and liquidity risk of banks. This interaction is found to make a risk neutral bank behave as if it were risk averse in an environment whe...

This paper investigates the liquidity effect in asset pricing by studying the liquiditypremium relationship of an American Depositary Receipt (ADR) and its underlying share. Using the Amihud (2002) measure, the turnover ratio and trading infrequency as proxies for liquidity, we show that a higher ADR premium is associated with higher ADR liquidity and lower home share liquidity, in terms of cha...

This paper proposes a new framework which captures the systemic nature of funding liquidity risk. Using this framework we develop a set of indicators which measure different aspects of the systemic funding liquidity risk in the interbank foreign currency lending market: (i) systemic funding liquidity needs, (ii) systemic vulnerability, (iii) systemic importance and (iv) systemic liquidity short...

We present a new measure of liquidity known as “latent liquidity” and apply it to a unique corporate bond database. Latent liquidity is defined as the weighted average turnover of investors who hold a bond, where the weights are the fractional investor holdings. It can be used to measure liquidity in markets with sparse transactions data. For bonds that trade frequently, our measure has predict...

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...

We investigate the evolution of market liquidity risk and its spillover effect across 50 countries using daily data from 1995 to 2010. From recent financial crisis, liquidity becomes an important issue for both developed and emerging countries. Lee (2011) showed that liquidity risk premium vary significantly differently in international financial markets. By employing four different types of li...

Secondary markets for long-term assets might be illiquid due to adverse selection. In a model in which moral hazard is confined to project initiation, I find that: (1) when agents expect a liquidity dry-up on such markets, they optimally choose to self-insure through the hoarding of non-productive but liquid assets; (2) such a response has negative externalities as it reduces ex-post market par...

During the recent debt crisis in Europe, policy makers responded to the controversy surrounding CDS by implementing a series of policies that banned CDS trading. Sambalaibat (2014) documents that a temporary CDS ban increased bond market liquidity but a permanent ban instead decreased bond market liquidity. To explain these patterns, I build a search-theoretic model of OTC bond and CDS markets ...

We argue that there is a connection between the interbank market for liquidity and the broader financial markets, which has its basis in demand for liquidity by banks. Tightness in the interbank market for liquidity leads banks to engage in what we term “liquidity pull-back”, e.g., selling assets in order to generate liquidity for themselves. By definition, trade in a highly liquid asset involv...