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...

Using a large data set on credit default swaps, we study how default risk interacts with interest-rate risk and liquidity risk to jointly determine the term structure of credit spreads. We classify the reference companies into two broad industry sectors, two broad credit rating classes, and two liquidity groups. We develop a class of dynamic term structure models that include (i) two benchmark ...

a r t i c l e i n f o We examine the role of liquidity risk, both as a stock characteristic as well as systematic liquidity risk, in UK mutual fund performance for the first time. We find that on average UK mutual funds are tilted towards liquid stocks (except for small stock funds as might be expected) but that, counter-intuitively, liquidity rather than illiquidity, as a stock characteristic ...

The global financial crisis highlighted the importance of ensuring that the financial system has adequate liquidity to withstand adverse circumstances. The funding pressures that began in 2007 underlined the acute deficiencies in the liquidity-risk-management practices of some banks, and the severity of the ensuing crisis required massive public sector support to stem the liquidity spiral and m...

This paper contributes to the debate about the extent to which liquidity risk affects asset prices. Motivated by evidence on downward liquidity spirals, flights to liquidity and investor perceptions of risk, we develop and test a liquidity-adjusted capital asset pricing model in which the key innovation is separating liquidity risk into asymmetric upside and downside risks. Our model bridges th...

We estimate latent factor models of liquidity and volatility. Common liquidity and volatility factors are extracted using multiple liquidity and volatility measures. Additionally, latent factors are extracted by aggregating across both liquidity and volatility resulting in what we will call the common “uncertainty” factors. We find that volatility and the common uncertainty risk are significant...

This paper explores the role of liquidity risk in the pricing of corporate bonds. We show that corporate bond returns have significant exposures to fluctuations in treasury bond liquidity and equity market liquidity. Further, this liquidity risk is a priced factor for the expected returns on corporate bonds, and the associated liquidity risk premia help to explain the credit spread puzzle. In t...

The study examines the existence of liquidity risk premia on freight derivatives returns. The Amihud liquidity ratio and bid-ask spreads are utilized to assess the existence of liquidity premia. Other macroeconomic variables are used to control for market risk. Results indicate that liquidity risk is priced and both liquidity measures have a significant role in determining freight derivatives r...

Large value payment and securities settlement systems are important components of an economy's nancial system. Many such systems are operated by central banks and are liquidity intensive. Central banks often provide inexpensive liquidity to facilitate settlement. This leads to a number of policy questions about the provision of such liquidity. To answer these questions, central banks need to un...