We describe and contrast three different measures of an institution’s credit risk. “Insolvency risk” is the conditional probability of default due to deterioration of asset quality if there is no run by short term creditors. “Total credit risk” is the unconditional probability of default, either because of a (short term) creditor run or (long run) asset insolvency. “Illiquidity risk”is the diff...

This paper provides a compact framework for banking regulation analysis in the presence of uncertainty between systemic liquidity and solvency shocks. Extending the work by Cao & Illing (2009a, b), it is shown that systemic liquidity shortage arises endogenously as part of the inferior mixed strategy equilibrium. The paper compares different traditional regulatory policies which intend to fix t...

Are securities markets more liquid when the economy is more liquid? If so, why? One possibility is that market depth depends on credit constrained intermediaries. This paper offers another explanation, which does not involve frictions or market segmentation. Measuring market illiquidity by the slope of the representative agent’s demand curve for a risky asset, I show that this slope is steeper ...

Market illiquidity, feedback e ects, presence of transaction costs, risk from unprotected portfolio Note 1: In the title, insert “a” or “the” before “Analytical”? and other nonlinear e ects in PDE-based option pricing models can be described by solutions to the generalized Black–Scholes parabolic equation with a di usion term nonlinearly depending on the option price itself. In this paper, di e...