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 https://papers.ssrn.com/sol3/papers.cfm?abstract_i...
Depositing User Christina Ihasz
Date Deposited 23 May 2019 08:18
Last Modified 25 Oct 2020 00:24
URI: https://www.alexandria.unisg.ch/publications/257072

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Citation

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

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https://www.alexandria.unisg.ch/id/eprint/257072
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