This paper adopts the methodology used by Fama and French (1993) to construct two measures of liquidity risk. These liquidity proxies solve the empirical issue of comparability between risk factors by utilizing the standardized unit of risk first proposed for size and value effects. As far as I know, this has not been done before. Modeling these additional liquidity premiums indicate an improve...

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...

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...

Many classes of microstructure models, as well as intuition, suggest that it should be easier to trade when markets are more active. In the data, however, volume and liquidity seem unrelated over time. This paper offers an explanation for this fact based on a simple frictionless model in which liquidity reflects the average risk-bearing capacity of the economy and volume reflects the changing c...

We provide a model of the impact of bank mergers on loan competition, individual reserve management and aggregate liquidity risk. Banks hold reserves against liquidity shocks, refinance in the interbank market and compete in a differentiated loan market. A merger creates an internal money market that induces financial cost advantages and may increase reserve holdings. We assess the liquidity ri...

Financial risks can be broadly classified into several categories, namely market risk, credit risk, liquidity risk, operational risk, and legal risk [1]. Market risk is the risk of loss arising from changes in the value of tradable or traded assets. Credit risk is the risk of loss due to the failure of the counterparty to pay the promised obligation. Liquidity risk is the risk of loss arising f...

This paper investigates how international money markets reflected credit and liquidity risk during the global financial crisis. After matching the currency denomination, we examine how the Tokyo Interbank Offered Rate (TIBOR) was synchronized with the London Interbank Offered Rate (LIBOR). We find remarkably asymmetric responses in market-specific and currency-specific risk during the crisis. T...

We document a positive relation between the volatility of liquidity and expected returns. Our measure of liquidity is based on Amihud (2002) and its volatility is measured using daily data. We show that the volatility of liquidity effect is different from previously documented liquidity risks: the covariance of stock returns with aggregate liquidity, the covariance of stock liquidity with aggre...