Liquidity Risk and Funding Cost

Item Type Monograph (Working Paper)
Abstract We propose and test a new channel that links funding liquidity risk and interest rates in short-term funding markets. Unlike existing theories that focus on premiums demanded by lenders, the funding liquidity risk channel postulates that borrowers exposed to liquidity shocks are willing to pay a markup for immediate funding. We test and quantify the channel using unique trade-by-trade data and uncover systematic differences across individual banks’ funding cost driven by idiosyncratic liquidity risk. These differences are persistent over a decade, suggesting that the funding liquidity risk channel is relevant in general and not only arises during crisis times.
Authors Bechtel, Alexander; Ranaldo, Angelo & Wrampelmeyer, Jan
Language English
Keywords Funding liquidity risk, short-term interest rates, risk premiums, funding costs, interbank market
Subjects finance
HSG Classification contribution to scientific community
HSG Profile Area SOF - System-wide Risk in the Financial System
Date 14 May 2019
Series Name School of Finance Workingpaper Series
Volume 2019
Number 03
Number of Pages 70
Official URL
Depositing User Christina Ihasz
Date Deposited 23 May 2019 08:18
Last Modified 22 Mar 2023 01:25


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Bechtel, Alexander; Ranaldo, Angelo & Wrampelmeyer, Jan: Liquidity Risk and Funding Cost. School of Finance Workingpaper Series, 2019, 03.

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