No. 2008/23 Endogenous Systemic Liquidity Risk

2009

Abstract: Traditionally, aggregate liquidity shocks are modelled as exogenous events. Extending our previous work (Cao & Illing, 2008), this paper analyses the adequate policy response to endogenous systemic liquidity risk. We analyse the feedback between lender ...

2012

This dissertation studies two aspects of the implications of liquidity risk-taking by financial institutions on the economy: first, its effects on macroeconomic volatility and the likelihood of financial distress; second, how the exposure to this source of risk is relevant in determining the failure of financial institutions in times of stress. Optimal regulatory responses are derived in the essays on both the macroprudential and the microprudential front. The first essay develops a welfare theoretic model to study prudential regulation in an emerging market economy that is facing large short-term capital inflows into the banking system. The prospect of a sudden reversal of those flows exposes the economy to liquidity risk. In the model banks finance investments in shortterm and long-term assets by borrowing both locally and externally. Government intervention is rationalized with an externality arising from financial frictions. The potential disruption in external financing constitutes the only source of aggregate risk. The analysis shows that inefficient equilibria exist. In those equilibria banks

Banking Regulation and the Financial Crisis, 2012

c CESifo Traditionally, aggregate liquidity shocks are modeled as exogenous events. This paper analyzes the adequate policy response to endogenous exposure to systemic liquidity risk. We analyze the feedback between lender-of-last-resort policy and incentives of private banks, determining the aggregate amount of liquidity available. We show that imposing minimum liquidity standards for banks ex ante is a crucial requirement for sensible lender-of-last-resort policy. In addition, we analyze the impact of equity requirements and narrow banking, in the sense that banks are required to hold sufficient liquid funds so as to pay out in all contingencies. We show that both policies are strictly inferior to imposing minimum liquidity standards ex ante combined with lender-of-last-resort policy.

Annals of Operations Research, 2016

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2016

Research hypothesis and contribution 1.3. Structure of the study 2. PREVIOUS RELATED STUDIES 3. SYSTEMIC RISK 3.1. The definition of systemic risk 3.2. Too-Big-to-Fail (TBTF) moral hazard and systemic risk 4. THE COMPLEX NATURE OF SYSTEMIC RISK 4.1. Domino effect or Contagion 4.2. Fire sale or a common shock 5. SYSTEMIC RISK MEASUREMENT 5.1. Stress test versus systemic risk (SRISK) 5.2. Expected Shortfall (ES) 5.3. Systemic risk (SRISK) 6. ECONOMETRIC APPROACHES FOR CALCULATING MES UNIVERSITY OF VAASA Faculty of Business Studies

RePEc: Research Papers in Economics, 2016

Overige Leden: dr. Jules van Binsbergen prof. dr. Mathijs van Dijk prof. dr. Bas Werker I would also like to thank my committee members. First, I would like to thank my host in Wharton, Professor Jules van Binsbergen, who is the most spontaneous analytical thinker I have ever met. His amazing talent of reading any report in 1 minute, and then asking the most relevant question always pushes our research to a new level. Encouraged by his comment, "Facing the problem!", we have the research idea of our new project together, and his simple compliments like "Perfect!", "Great!", and easy attitude toward research "Let's play it by ear in Skype!", constantly make me excited and go further in my research. Second, I would like to thank my master thesis supervisor Professor Bas Werker, who has also been very straight forward and supportive to me. I still remember that after he gave a high grade to my master thesis, he suggested me to compromise with the reality and improve my English, and when I told him the PhD positions in Finance Department were very competitive in that year, he instantly agreed to write a reference letter for me. Third, I would also like to thank my co-supervisor Professor Alberto Manconi for asking me "How do you see yourself 5 years from now?", that helps me clarify my long-term research interest as mutual funds. Last, I would like to thank Professor Mathijs van Dijk for letting my pre-defense be an enjoyable moment, and for your brilliant comments and suggestions. I would like to thank the Finance Department of Tilburg University for offering a great research environment for Ph.D. students. It gives me many opportunities to present my work at various conferences, and I constantly received feedback on my work from the members of our department. I also would like to thank Marie-Cecile, Loes, and Helma for their efficient work, and also all secretaries in CentER Graduate Office, especially Ank, Corine for assisting me in many different ways. Part of this research has been conducted during my visit at the Wharton School, the University of Pennsylvania. I am indebted to Professor Jules van Binsbergen, my host, for making this visit possible. I would also like to thank the faculty members of the Finance Department for the many discussions about research and courses I have attended. In particular, I would like to thank Professor Amir Yaron, for the wonderful asset pricing lectures he gave, Hongxun, who later becomes my coauthor, Daniel and Darien, for the interesting discussions we had, Elisabeth, for sharing the office with me, and Jack, for the unforgettable ski trip in Blue Mountain. Besides, I also would like to thank Servaas for his company as a fellow visitor from Tilburg. It makes our visit like a I would like to thank all my friends who made the years of my Ph.D. in Tilburg enjoyable. I am thankful to my fellow PhD students, especially Elisabeth, Hao, Cisil,

Financial Markets and Portfolio Management, 2010

This paper provides a baseline model for regulatory analysis of systemic liquidity shocks. We show that banks may have an incentive to invest excessively in illiquid long-term projects. In the prevailing mixed-strategy equilibrium, the allocation is inferior from the investor’s point of view since some banks free ride on the liquidity provision due to their limited liability. The paper compares

By stepping between bilateral counterparties, a central counterparty (CCP) transforms credit exposure. CCPs generally improve financial stability. Nevertheless, large CCPs are by nature concentrated and interconnected with major global banks. Moreover, although they mitigate credit risk, CCPs create liquidity risks, because they rely on participants to provide cash. Such requirements increase with both market volatility and default; consequently, CCP liquidity needs are inherently procyclical. This procyclicality makes it more challenging to assess CCP resilience in the rare event that one or more large financial institutions default. Liquidity-focused macroprudential stress tests could help to assess and manage this systemic liquidity risk.

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