A liquidity risk stress-testing framework with interaction between market and credit risks Eric Wong* and Cho-Hoi Hui* This version: April 11, 2011 Abstract This study develops a framework for stress testing banks’ liquidity risk, where liquidity and default risks can stem from market risk arising from asset price shocks. The risks are assumed to be transmitted through three channels. First, ba...

Japan has been in a benign liquidity trap since the 1990s. In a benign liquidity trap, interest rates approach zero and monetary policy is ineffective but output and employment perform decently. Such a pattern contradicts traditional macro theories. This paper introduces a monetary general equilibrium model that is compatible with Japan’s performance and resolves puzzles associated with liquidi...

This study investigates the relationship between earnings management and equity liquidity, positing that as incentives arise for the manipulation of firm performance through earnings management (due partly to conflicts of interest between firm insiders and outsiders), greater earnings management may signal higher adverse selection costs. If earnings manipulation reveals aggressive accounting pr...

A bank as a business units needs to have liquid assets which can be easily converted into cash at short notice. Thus the concept of liquidity risk management is important for any commercial banks. The impact of liquidity position in management of banks have remained significant, though very elusive in the process of investment analysis vis-à-vis bank portfolio management. In addition, liquidity...

Securities Trading when Liquidity Providers are Informed Abstract We study securities trading when liquidity is provided by informed agents—either because dealers have superior access to market information or because informed traders exploit strategies involving limit orders. In the case of informed dealers, we show that dealers and informed traders profit more at the expense of uninformed liqu...

We develop a structural bond valuation model to simultaneously capture liquidity and credit risk. Our model implies that renegotiation in financial distress is influenced by the illiquidity of the market for distressed debt. As default becomes more likely, the components of bond yield spreads attributable to illiquidity increase. When we consider finite maturity debt, we find decreasing and con...

The Value of Liquidity investments and derivatives space, and this paper provides some quantitative insights on the value of liquidity. Abstract We present a game-theoretic example that helps to illustrate the value of liquidity. These insights are applicable to hedge fund investors since hedge funds have different lock-up and redemption terms. This game also shows the danger of relying on intu...

The purpose of this paper is to make a comparative analysis of modern gross payment systems, emphasizing on the implications of the availability of intraday liquidity and the different mechanisms used to provide this liquidity. The possibility of default and the risk of the intraday credit are first introduced to determine the implications of its existence on banks’ behaviour and on the probabi...

The paper shows that controlling for the aggregate volatility risk factor eliminates the puzzling negative relation between variability of trading activity and future abnormal returns. I find that variability of other measures of liquidity and liquidity risk is largely unrelated to expected returns. Lastly, I show that the low returns to firms with high variability of trading activity are not e...

In recent years, a large number of countries have made reporting under International Financial Reporting Standards (IFRS) mandatory. The capital-market effects of this change have been extensively studied, but their sources are not yet well understood and still heavily debated. This paper presents new evidence that aims to distinguish between several potential explanations for these capital-mar...