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Journal articles on the topic 'Liquidity frictions'

Author: Grafiati

Published: 24 January 2023

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1

Cui, Wei, and Sören Radde. "Money and Asset Liquidity in Frictional Capital Markets." American Economic Review 106, no. 5 (May 1, 2016): 496–502. http://dx.doi.org/10.1257/aer.p20161078.

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We endogenize asset liquidity and financing constraints in a dynamic general equilibrium model with search frictions on capital markets. Assets traded on frictional capital markets are only partially saleable. Liquid assets, such as fiat money, instead, are not subject to search frictions and can be used to insure idiosyncratic investment risks. Partially saleable assets thus carry a liquidity premium over fully liquid assets. We show that, in equilibrium, low asset saleability is typically associated with lower asset prices, tighter financing constraints, thus stronger demand for public liquidity. Lower asset liquidity feeds into real allocations, constraining real investment, consumption, and production.

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2

Hendry, Scott, and Guang-Jia Zhang. "Liquidity effects and market frictions." Journal of Macroeconomics 23, no. 2 (March 2001): 153–76. http://dx.doi.org/10.1016/s0164-0704(01)00159-8.

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3

Dellas, Harris, Behzad Diba, and Olivier Loisel. "LIQUIDITY SHOCKS, EQUITY-MARKET FRICTIONS, AND OPTIMAL POLICY." Macroeconomic Dynamics 19, no. 6 (February 26, 2014): 1195–219. http://dx.doi.org/10.1017/s1365100513000795.

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In this paper, we study the positive and normative implications of financial shocks in a standard New Keynesian model that includes banks and frictions in the market for bank capital. We show how such frictions influence materially the effects of bank liquidity shocks and the properties of optimal policy. In particular, they limit the scope for countercyclical monetary policy in the face of these shocks. A fiscal policy instrument can complement monetary policy by offsetting the balance-sheet effects of these shocks, and jointly optimal policies attain the same equilibrium that monetary policy (alone) could attain in the absence of equity-market frictions.

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4

Cui, Wei. "Monetary–fiscal interactions with endogenous liquidity frictions." European Economic Review 87 (August 2016): 1–25. http://dx.doi.org/10.1016/j.euroecorev.2016.03.007.

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5

Li, Yan. "LIMITED PARTICIPATION, LABOR MARKET SEARCH AND LIQUIDITY EFFECTS." Macroeconomic Dynamics 15, no. 2 (January 14, 2010): 201–22. http://dx.doi.org/10.1017/s136510050999112x.

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This paper models the liquidity effects after a contractionary open market operation in a framework that highlights the frictions of limited participation in financial markets and search frictions in labor markets. It is shown that Lucas rigidities, with the aid of labor market rigidities, could generate more persistent liquidity effects even in a context of flexible prices. In addition, the simulation results show that this adapted liquidity and labor search model does a reasonable good job in explaining the observed labor market dynamics in response to shocks of a plausible magnitude, and deliver substantial movements along a downward-sloping Beveridge curve.

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6

Kozlowski, Julian. "Long-Term Finance and Investment with Frictional Asset Markets." American Economic Journal: Macroeconomics 13, no. 4 (October 1, 2021): 411–48. http://dx.doi.org/10.1257/mac.20190353.

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Trading frictions in financial markets affect more long-term than short-term bonds, generating an upward-sloping yield curve. Long-term financing is more expensive in economies with higher trading frictions so firms choose to borrow and invest in shorter horizons and lower productivity projects. The theory guides a new identification of the slope of liquidity spread in the data. We measure and calibrate the model for the United States, and counterfactual exercises suggest that variations in trading frictions can have significant effects on maturity choices and investment. A policy intervention improves liquidity, reduces long-term financial costs, and promotes investment in longer-term projects. (JEL E43, E44, E52, G12, G21, G32, O16)

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7

Mashamba, Tafirei. "Liquidity Dynamics of Banks in Emerging Market Economies." Journal of Central Banking Theory and Practice 11, no. 1 (January 1, 2022): 179–206. http://dx.doi.org/10.2478/jcbtp-2022-0008.

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Abstract This study examines the liquidity dynamics of banks in emerging market economies. Using annual data of 91 commercial banks from 11 countries, the study established that banks in emerging markets have target liquidity ratios they pursue and partially adjust due to market frictions. Overall, risk aversion and prudence play a significant role in explaining the liquidity dynamics by banks in emerging market economies.

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8

Arseneau, David M., David E. Rappoport W., and Alexandros P. Vardoulakis. "Private and public liquidity provision in over‐the‐counter markets." Theoretical Economics 15, no. 4 (2020): 1669–712. http://dx.doi.org/10.3982/te3419.

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We show that trade frictions in over‐the‐counter (OTC) markets result in inefficient private liquidity provision. We develop a dynamic model of market‐based financial intermediation with a two‐way interaction between primary credit markets and secondary OTC markets. Private allocations are generically inefficient due to a congestion externality operating through market liquidity in the OTC market. This inefficiency can lead to liquidity that is suboptimally low or high compared to the second best, providing a rationale for the regulation and public provision of liquidity. Moreover, our model characterizes a transmission channel of quantitative easing or tightening that operates through liquidity premia.

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9

Gehde-Trapp, Monika, Philipp Schuster, and Marliese Uhrig-Homburg. "The Term Structure of Bond Liquidity." Journal of Financial and Quantitative Analysis 53, no. 5 (September 6, 2018): 2161–97. http://dx.doi.org/10.1017/s0022109018000364.

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We analyze the impact of market frictions on the trading volume and liquidity premia of finite-maturity assets when investors differ in their trading needs. Our equilibrium model generates a clientele effect (frequently trading investors hold only short-term assets) and predicts i) a hump-shaped relation between trading volume and maturity, ii) lower trading volumes of older compared with younger assets, iii) an increasing liquidity term structure from ask prices, iv) a decreasing or U-shaped liquidity term structure from bid prices, and v) spillovers of liquidity from short-term to long-term maturities. Empirical tests for U.S. corporate bonds support our theoretical predictions.

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10

Del Negro, Marco, Gauti Eggertsson, Andrea Ferrero, and Nobuhiro Kiyotaki. "The Great Escape? A Quantitative Evaluation of the Fed's Liquidity Facilities." American Economic Review 107, no. 3 (March 1, 2017): 824–57. http://dx.doi.org/10.1257/aer.20121660.

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We introduce liquidity frictions into an otherwise standard DSGE model with nominal and real rigidities and ask: can a shock to the liquidity of private paper lead to a collapse in short-term nominal interest rates and a recession like the one associated with the 2008 US financial crisis? Once the nominal interest rate reaches the zero bound, what are the effects of interventions in which the government provides liquidity in exchange for illiquid private paper? We find that the effects of the liquidity shock can be large, and show some numerical examples in which the liquidity facilities of the Federal Reserve prevented a repeat of the Great Depression in the period 2008–2009. (JEL E13, E31, E43, E44, E52, E58, G01)

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11

Beaubrun-Diant, Kevin E., and Fabien Tripier. "Search Frictions, Credit Market Liquidity and Net Interest Margin Cyclicality." Economica 82, no. 325 (June 13, 2014): 79–102. http://dx.doi.org/10.1111/ecca.12101.

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12

Ding, Mingfa, Birger Nilsson, and Sandy Suardi. "Foreign Institutional Investment, Ownership, and Liquidity: Real and Informational Frictions." Financial Review 52, no. 1 (January 12, 2017): 101–44. http://dx.doi.org/10.1111/fire.12126.

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13

Gehde-Trapp, Monika, Yalin Gündüz, and Julia Nasev. "The liquidity premium in CDS transaction prices: Do frictions matter?" Journal of Banking & Finance 61 (December 2015): 184–205. http://dx.doi.org/10.1016/j.jbankfin.2015.08.024.

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14

Bianchi, Javier, and Saki Bigio. "Banks, Liquidity Management, and Monetary Policy." Econometrica 90, no. 1 (2022): 391–454. http://dx.doi.org/10.3982/ecta16599.

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We develop a tractable model of banks' liquidity management with an over‐the‐counter interbank market to study the credit channel of monetary policy. Deposits circulate randomly across banks and must be settled with reserves. We show how monetary policy affects the banking system by altering the trade‐off between profiting from lending and incurring greater liquidity risk. We present two applications of the theory, one involving the connection between the implementation of monetary policy and the pass‐through to lending rates, and another considering a quantitative decomposition behind the collapse in bank lending during the 2008 financial crisis. Our analysis underscores the importance of liquidity frictions and the functioning of interbank markets for the conduct of monetary policy.

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15

Kim, You Suk, Donghoom Lee, Tess Scharlemann, and James Vickery. "Intermediation Frictions in Debt Relief: Evidence from CARES Act Forbearance." Finance and Economics Discussion Series 2021, no. 055r1 (March 31, 2022): 1–65. http://dx.doi.org/10.17016/feds.2022.017.

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We study the role of mortgage servicers in implementing the CARES Act mortgage forbearance program during the COVID-19 pandemic. Despite universal eligibility, around one-third of the nonperforming federally-backed loans in our sample fail to enter into forbearance. The relative frequency of these "missing" forbearances varies significantly across servicers for observably similar loans, with small servicers and nonbanks, and especially nonbanks with small liquidity buffers, having a lower propensity to provide forbearance. The incidence of forbearance-related complaints by borrowers is also higher for these servicers. We also use servicer-level variation to estimate the causal effect of forbearance on borrower outcomes. Assignment to a "high-forbearance" servicer translates to a significant increase in the probability of nonpayment, which moves essentially 1:1 with the forbearance probability. Part of this additional household liquidity is used to pay down high-cost credit card debt.

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16

Darolles, Serge, Gaëlle Le Fol, and Gulten Mero. "Mixture of distribution hypothesis: Analyzing daily liquidity frictions and information flows." Journal of Econometrics 201, no. 2 (December 2017): 367–83. http://dx.doi.org/10.1016/j.jeconom.2017.08.014.

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17

Benmelech, Efraim, and Nittai K. Bergman. "Credit Traps." American Economic Review 102, no. 6 (October 1, 2012): 3004–32. http://dx.doi.org/10.1257/aer.102.6.3004.

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This paper studies the limitations of monetary policy in stimulating credit and investment. We show that, under certain circumstances, unconventional monetary policies fail in that liquidity injections into the banking sector are hoarded and not lent out. We use the term “credit traps” to describe such situations and show how they can arise due to the interplay between financing frictions, liquidity, and collateral values. We show that small contractions in monetary policy can lead to a collapse in lending. Our analysis demonstrates how quantitative easing may be useful in increasing collateral prices, bank lending, and aggregate investment. (JEL E44, E52, E58, G01)

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18

Cole, Shawn, Xavier Giné, Jeremy Tobacman, Petia Topalova, Robert Townsend, and James Vickery. "Barriers to Household Risk Management: Evidence from India." American Economic Journal: Applied Economics 5, no. 1 (January 1, 2013): 104–35. http://dx.doi.org/10.1257/app.5.1.104.

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Why do many households remain exposed to large exogenous sources of nonsystematic income risk? We use a series of randomized field experiments in rural India to test the importance of price and nonprice factors in the adoption of an innovative rainfall insurance product. Demand is significantly price sensitive, but widespread take-up would not be achieved even if the product offered a payout ratio comparable to US insurance contracts. We present evidence suggesting that lack of trust, liquidity constraints, and limited salience are significant nonprice frictions that constrain demand. We suggest possible contract design improvements to mitigate these frictions. (JEL D14, D81, O12, O13, O16, O18, Q12)

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19

Williamson, Stephen D. "Liquidity, Monetary Policy, and the Financial Crisis: A New Monetarist Approach." American Economic Review 102, no. 6 (October 1, 2012): 2570–605. http://dx.doi.org/10.1257/aer.102.6.2570.

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A model of public and private liquidity integrates financial intermediation theory with a New Monetarist monetary framework. Non-passive fiscal policy and costs of operating a currency system imply that an optimal policy deviates from the Friedman rule. A liquidity trap can exist in equilibrium away from the Friedman rule, and there exists a permanent nonneutrality of money, driven by an illiquidity effect. Financial frictions can produce a financial-crisis phenomenon that can be mitigated by conventional open market operations working in an unconventional manner. Private asset purchases by the central bank are either irrelevant or they reallocate credit and redistribute income. (JEL E13, E44, E52, E62, G01)

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20

Gilchrist, Simon, Raphael Schoenle, Jae Sim, and Egon Zakrajšek. "Inflation Dynamics during the Financial Crisis." American Economic Review 107, no. 3 (March 1, 2017): 785–823. http://dx.doi.org/10.1257/aer.20150248.

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Using a novel dataset, which merges good-level prices underlying the PPI with the respondents' balance sheets, we show that liquidity constrained firms increased prices in 2008, while their unconstrained counterparts cut prices. We develop a model in which firms face financial frictions while setting prices in customer markets. Financial distortions create an incentive for firms to raise prices in response to adverse financial or demand shocks. This reaction reflects the firms' decisions to preserve internal liquidity and avoid accessing external finance, factors that strengthen the countercyclical behavior of markups and attenuate the response of inflation to fluctuations in output. (JEL E31, E32, E44, G01, G32, L11)

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21

Sin, Jasmin. "The Fiscal Multiplier in Small Open Economy: The Role of Liquidity Frictions." IMF Working Papers 16, no. 138 (2016): 1. http://dx.doi.org/10.5089/9781498366298.001.

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22

Carrillo, Julio A., and Céline Poilly. "How do financial frictions affect the spending multiplier during a liquidity trap?" Review of Economic Dynamics 16, no. 2 (April 2013): 296–311. http://dx.doi.org/10.1016/j.red.2013.01.004.

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23

Acharya, Viral V., Denis Gromb, and Tanju Yorulmazer. "Imperfect Competition in the Interbank Market for Liquidity as a Rationale for Central Banking." American Economic Journal: Macroeconomics 4, no. 2 (April 1, 2012): 184–217. http://dx.doi.org/10.1257/mac.4.2.184.

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We study interbank lending and asset sales markets in which banks with surplus liquidity have market power vis-à-vis banks needing liquidity, frictions arise in lending due to moral hazard, and assets are bank-specific. Surplus banks ration lending and instead purchase assets from needy banks, an inefficiency more acute during financial crises. A central bank acting as a lender-of-last-resort can ameliorate this inefficiency provided it is prepared to extend potentially loss-making loans or is better informed than outside markets, as might be the case if it also performs a supervisory role. This rationale for central banking finds support in historical episodes. (JEL E58, G01, G21, G28, L13, N21)

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24

Üslü, Semih. "Pricing and Liquidity in Decentralized Asset Markets." Econometrica 87, no. 6 (2019): 2079–140. http://dx.doi.org/10.3982/ecta14713.

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I develop a search‐and‐bargaining model of endogenous intermediation in over‐the‐counter markets. Unlike the existing work, my model allows for rich investor heterogeneity in three simultaneous dimensions: preferences, inventories, and meeting rates. By comparing trading‐volume patterns that arise in my model and are observed in practice, I argue that the heterogeneity in meeting rates is the main driver of intermediation patterns. I find that investors with higher meeting rates (i.e., fast investors) are less averse to holding inventories and more attracted to cash earnings, which makes the model corroborate a number of stylized facts that do not emerge from existing models: (i) fast investors provide intermediation by charging a speed premium, and (ii) fast investors hold more extreme inventories. Then, I use the model to study the effect of trading frictions on the supply and price of liquidity. On social welfare, I show that the interaction of meeting rate heterogeneity with optimal inventory management makes the equilibrium inefficient. I provide a financial transaction tax/subsidy scheme that corrects this inefficiency, in which fast investors cross‐subsidize slow investors.

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25

Kouretas, Georgios P., and Athanasios P. Papadopoulos. "INTRODUCTION TO THE SPECIAL ISSUE ON GROWTH, OPTIMAL FISCAL AND MONETARY POLICY, AND FINANCIAL FRICTIONS." Macroeconomic Dynamics 19, no. 6 (March 21, 2014): 1167–70. http://dx.doi.org/10.1017/s1365100514000017.

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Since 1997, the Department of Economics of the University of Crete has organized an annual international conference on macroeconomic analysis and international finance. The articles included in this special issue are refereed versions of papers presented at the 17th International Conference on Macroeconomic Analysis and International Finance held at the University Campus, Rethymno, 30 May–1 June 2013, and submitted to Macroeconomic Dynamics in an open call for papers. The central theme of this Special Issue is Growth, Optimal Fiscal and Monetary Policy, and Financial Frictions. The topics discussed in this issue are endogenous growth and public investment and taxation; optimal inflation and fiscal and monetary policy; foreign reserve accumulation and China's exchange rate policy; and liquidity shocks and financial frictions. We begin the Special Issue with an overview of these papers.

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26

Hanafi, Norshafizah, Amirul Hamiza Abdul Hamid, and Jasmani Mohd Yunus. "The Empirical Study on Market Liquidity and Determinants of Sukuk in Malaysia." Indian-Pacific Journal of Accounting and Finance 2, no. 3 (July 1, 2018): 4–15. http://dx.doi.org/10.52962/ipjaf.2018.2.3.56.

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The purpose of this study is to examine the relationship between market liquidity and the determinants of Sukuk in Malaysia’s perspective. This study is also to determine whether the Sukuk market is also reacting as similar to the bond market regarding market liquidity. A sample of 933 issued Sukuk in Malaysia is collected from secondary data of Bond Pricing of Agency Malaysia (BPAM) and Bond Info hub of Bank Negara Malaysia from the period of 2005 to 2015. The sample of issued Sukuk is based on Malaysian Ringgit denominated currency and these Sukuk are actively traded in the secondary market of Malaysia. The sample comprises five (5) sectors inclusive government, quasi-government, finance; Asset-Backed Securities (ABS) and corporates. Market Microstructure Theory is using on the impact of numerous market frictions in the market structure and individual behaviour during the price determination process in this study. The empirical results of this study show that age and maturity have a positive relationship with Sukuk market liquidity and they are significantly correlated. The findings of this study could assist investors in the making decision by choosing the right type of Sukuk structure and by utilising the suitable Sukuk determinants at the right time. From the analysis, the researcher concludes that investors prefer to hold their securities until meeting its maturity rather than traded it in the secondary market. Further research should be done by incorporating other liquidity factors such as the liquidity risk, yield spread and price in order to have more input to the study on liquidity since the Sukuk market is increasing in demand and becomes more sophisticated as the financial market is moving towards digitalisation and electrification.

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27

Gomes, Joao F. "Financing Investment." American Economic Review 91, no. 5 (December 1, 2001): 1263–85. http://dx.doi.org/10.1257/aer.91.5.1263.

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We examine investment behavior when firms face costs in the access to external funds. We find that despite the existence of liquidity constraints, standard investment regressions predict that cash flow is an important determinant of investment only if one ignores q. Conversely, we also obtain significant cash flow effects even in the absence of financial frictions. These findings provide support to the argument that the success of cash-flow-augmented investment regressions is probably due to a combination of measurement error in q and identification problems. (JEL E22, E44, G31)

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28

ASVANUNT, ATTAKRIT, MARK BROADIE, and SURESH SUNDARESAN. "MANAGING CORPORATE LIQUIDITY: STRATEGIES AND PRICING IMPLICATIONS." International Journal of Theoretical and Applied Finance 14, no. 03 (May 2011): 369–406. http://dx.doi.org/10.1142/s0219024911006589.

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Defaults arising from illiquidity can lead to private workouts, formal bankruptcy proceedings or even liquidation. All these outcomes can result in deadweight losses. Corporate illiquidity in the presence of realistic capital market frictions can be managed by (a) equity dilution, (b) carrying positive cash balances, or (c) entering into loan commitments with a syndicate of lenders. An efficient way to manage illiquidity is to rely on mechanisms that transfer cash from "good states" into "bad states" (i.e., financial distress) without wasting liquidity in the process. In this paper, we first investigate the impact of costly equity dilution as a method to deal with illiquidity, and characterize its effects on corporate debt prices and optimal capital structure. We show that equity dilution produces lower firm value in general. Next, we consider two alternative mechanisms: cash balances and loan commitments. Abstracting from future investment opportunities and share re-purchases, which are strong reasons for corporate cash holdings, we show that carrying positive cash balances for managing illiquidity is in general inefficient relative to entering into loan commitments, since cash balances (a) may have agency costs, (b) reduce the riskiness of the firm thereby lowering the option value to default, (c) postpone or reduce dividends in good states, and (d) tend to inject liquidity in both good and bad states. Loan commitments, on the other hand, (a) reduce agency costs, and (b) permit injection of liquidity in bad states as and when needed. Then, we study the trade-offs between these alternative approaches to managing corporate illiquidity. We show that loan commitments can lead to an improvement in overall welfare and reduction in spreads on existing debt for a broad range of parameter values. We derive explicit pricing formulas for debt and equity prices. In addition, we characterize the optimal draw down strategy for loan commitments, and study its impact on optimal capital structure.

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29

Hwang, Sang Won. "The Effect of Discriminative Trading Frictions on Option Strategies." Journal of Derivatives and Quantitative Studies 26, no. 1 (February 28, 2018): 27–57. http://dx.doi.org/10.1108/jdqs-01-2018-b0002.

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I estimate that a margin as trading frictions has an effect on the strategies of writing options. The important results are as follows. First, by the margin requirement is increased, the size of short position is reduced. Second, the discrimination of a margin requirement is due to the way that the member margin is imposed less about 1/3 than the customer margin by derivatives market business regulation in KRX. Third, the customer margin is from 1.4 to 1.6 times more than the member margin, and the margin “haircut” ratio is similar to that of the margin. Fourth, by target weight increases, the difference between target weight and effective weight is increased. Fifth, by target weight is increased, the member have higher returns on writing combination position than the customer have. It means that when investors increase the size of short position using all of account, they not only can suffer loss because of margin call but also can make profit. Overall, the difference between the returns of the member and the returns of the customer can be quite substantial. So, this paper contributes to the literature that studies the impact of the different imposition of margins by showing how frictions limit the customer from supplying liquidity to the market and hence releasing pressure on the member.

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30

Reichling, Felix, and Kent Smetters. "Optimal Annuitization with Stochastic Mortality and Correlated Medical Costs." American Economic Review 105, no. 11 (November 1, 2015): 3273–320. http://dx.doi.org/10.1257/aer.20131584.

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The conventional wisdom since Yaari (1965) is that households without a bequest motive should fully annuitize their investments. Numerous frictions do not break this sharp result. We modify the Yaari framework by allowing a household's mortality risk itself to be stochastic due to health shocks. A lifetime annuity still helps to hedge longevity risk. But the annuity's remaining present value is correlated with medical costs, such as those for nursing home care, thereby reducing annuity demand, even without ad-hoc liquidity constraints. We find that most households should not hold a positive level of annuities, and many should hold negative amounts. (JEL D14, D82, G23, I12, J14, J26)

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31

Perri, Fabrizio, and Vincenzo Quadrini. "International Recessions." American Economic Review 108, no. 4-5 (April 1, 2018): 935–84. http://dx.doi.org/10.1257/aer.20140412.

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Macro developments leading up to the 2008 crisis displayed an unprecedented degree of international synchronization. Before the crisis, all G7 countries experienced credit growth and, around the time of the Lehman bankruptcy, they all faced sharp and large contractions in both real and financial activity. Using a two-country model with financial frictions, we show that a global liquidity shortage induced by pessimistic self-fulfilling expectations can quantitatively generate patterns like those observed in the data. The model also suggests that crises are less frequent with more international financial integration but, when they hit, they are larger and more synchronized across countries. (JEL E23, E32, E44, F44, G01)

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32

Garriga, Carlos, and Aaron Hedlund. "Mortgage Debt, Consumption, and Illiquid Housing Markets in the Great Recession." American Economic Review 110, no. 6 (June 1, 2020): 1603–34. http://dx.doi.org/10.1257/aer.20170772.

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Using a quantitative heterogeneous agents macro-housing model and detailed microdata, this paper studies the drivers of the 2006–2011 housing bust, its spillovers to consumption and the credit market, and the ability of mortgage rate interventions to accelerate the recovery. The model features tenure choice between owning and renting, rich portfolio choice, long-term defaultable mortgages, and endogenously illiquid housing from search frictions. The equilibrium analysis and empirical evidence suggest that the deterioration in house prices and liquidity, transmitted to consumption via balance sheets that vary in composition and depth, is central to explaining the observed aggregate and cross-sectional patterns. (JEL E23, E32, E44, G21, R31)

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33

Vavoura, Chara. "How Trade Dampens the Impact of Financial Frictions in the Presence of Large Firms." Economies 10, no. 11 (October 27, 2022): 266. http://dx.doi.org/10.3390/economies10110266.

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In this paper we aim, first, to examine how an economy’s financial development affects the welfare gains from trade and, second, to uncover how large firms threaten to suppress these gains, through the exertion of market power and their confirmed preferential access to liquidity. To this purpose, we propose a theoretical model of international trade with financial constraints, which are different between large oligopolists and small monopolistic competitors. We show that trade diminishes the impact of credit misallocation and financial frictions and creates welfare gains by intensifying selection and boosting competition. We find that welfare gains are higher under harsher domestic distortions, meaning that trade particularly benefits developing economies, acting as a substitute for financial development. Nevertheless, in the shadow of large firms, gains from trade are diminished, even more so when such firms are rare and, therefore, more powerful. We conclude that international trade is a prerequisite for financial and economic development but the benefits from globalization are not fully reaped unless large-firm entry and competition are facilitated. We trust that our findings are extremely relevant for developing economies, which are often export-oriented, but, at the same time, suffer from severe credit market inefficiencies and a shortage of large incumbents.

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34

Bozhkov, Stanislav, Habin Lee, Uthayasankar Sivarajah, Stella Despoudi, and Monomita Nandy. "Idiosyncratic risk and the cross-section of stock returns: the role of mean-reverting idiosyncratic volatility." Annals of Operations Research 294, no. 1-2 (April 6, 2018): 419–52. http://dx.doi.org/10.1007/s10479-018-2846-7.

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Abstract A key prediction of the Capital Asset Pricing Model (CAPM) is that idiosyncratic risk is not priced by investors because in the absence of frictions it can be fully diversified away. In the presence of constraints on diversification, refinements of the CAPM conclude that the part of idiosyncratic risk that is not diversified should be priced. Recent empirical studies yielded mixed evidence with some studies finding positive correlation between idiosyncratic risk and stock returns, while other studies reported none or even negative correlation. We examine whether idiosyncratic risk is priced by the stock market and what are the probable causes for the mixed evidence produced by other studies, using monthly data for the US market covering the period from 1980 until 2013. We find that one-period volatility forecasts are not significantly correlated with stock returns. The mean-reverting unconditional volatility, however, is a robust predictor of returns. Consistent with economic theory, the size of the premium depends on the degree of ‘knowledge’ of the security among market participants. In particular, the premium for Nasdaq-traded stocks is higher than that for NYSE and Amex stocks. We also find stronger correlation between idiosyncratic risk and returns during recessions, which may suggest interaction of risk premium with decreased risk tolerance or other investment considerations like flight to safety or liquidity requirements. We identify the difference between the correlations of the idiosyncratic volatility estimators used by other studies and the true risk metric the mean-reverting volatility as the likely cause for the mixed evidence produced by other studies. Our results are robust with respect to liquidity, momentum, return reversals, unadjusted price, liquidity, credit quality, omitted factors, and hold at daily frequency.

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Cao, Charles, Matthew Gustafson, and Raisa Velthuis. "Index Membership and Small Firm Financing." Management Science 65, no. 9 (September 2019): 4156–78. http://dx.doi.org/10.1287/mnsc.2017.2975.

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This paper investigates the extent to which index membership affects small firm financing. Using a regression discontinuity specification around the lower cutoff of the Russell 2000 small-cap index, we find that index membership causes small firms to transition away from bank financing in favor of seasoned equity offerings. These effects are concentrated in the year following Russell 2000 additions and do not reverse immediately upon deletions. Liquidity, the elasticity of demand for equity, and analyst coverage also significantly increase following Russell 2000 additions but do not significantly decrease following deletions. Finally, firms added to the Russell 2000 obtain lower spreads and have fewer covenants on the bank loans that they do initiate. Our findings are consistent with index membership mitigating the financing frictions of small firms by improving their information environment through increased investor awareness. This paper was accepted by Amit Seru, finance.

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Uhunmwangho, Monday. "The Effect of Regulations on Stock Market Risk (Volatility) in Nigeria." EMAJ: Emerging Markets Journal 12, no. 1 (August 17, 2022): 94–100. http://dx.doi.org/10.5195/emaj.2022.255.

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Recent regulations are directed at mitigating financial market risk, because risks, especially volatility dampen investors’ confidence, and hinder firms’ ability to raise funds at the exchange. Though, volatility had been investigated in the past, the joint utilization of micro and macro regulatory tools to address it after the global crisis is rare. It is on this backdrop that this study investigates the effect of regulations on stock market risk (volatility) in Nigeria. Thirteen interest charging banks listed in the Nigerian Exchange Limited for the period of 2010-2020 were investigated, because bank stocks are mostly traded at the exchange. Data for this study were collected from the banks’ annual reports, stock exchange official daily price lists as well as the Central Bank of Nigeria Statistical Bulletin various issues. The first difference generalized method of moments (DGMM) and the dynamic model were engaged in the investigation. Results of this study reveal that regulatory liquidity ratio and monetary policy rate positively and significantly impact stock market risk (volatility), while prescribe cash reserve ratio has negative and significant effects. The implication of this finding is that regulations except cash reserve instruments constitute frictions impacting equity market risk. Therefore, it is recommended that caution is exercised in the use of micro and macro regulatory weapons. Otherwise, investors’ confidence will decline and investments will reduce.

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Yang, Qiuyi, Youze Lang, and Changsheng Xu. "Is the High Interest Rate Combined with Intense Deleveraging Campaign Desirable? A Collateral Mechanism under Stringent Credit Constraints." Sustainability 10, no. 12 (December 16, 2018): 4803. http://dx.doi.org/10.3390/su10124803.

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Recently, China has witnessed a continuously increasing Debt-to-GDP ratio and a vigorously expanding shadow banking sector. Housing prices hovering at a high level seriously affect the lives of ordinary residents. Disappointingly, a variety of activities such as intense deleveraging campaigns and tight monetary controls produce little effect. Why do these seemingly rightful implementations hardly work? What should governments do to stop the incessant expansion of asset bubbles? What role ought financial supervisors to play in regulating credit markets and facilitating a sustainable and inclusive economic growth? This paper sets off from the pledgeability of asset bubbles and constructs a generalized overlapping generation (OLG) model incorporating financial frictions and collateral constraints, in order to explore the bubble evolution under the alterations of market interest rates and credit conditions. The results show a unique bubble equilibrium, in which the steady-state bubble size expands when interest rate increases. Numerical results further reveal that the bubble-inflation effect of a higher interest rate is reinforced by a more stringent collateral constraint. Our research contributes to an explanation of the inefficacy of present policies and provides the following policy implications: The combination of an interest rate elevation and a strong loan restriction is in fact undesirable for suppressing asset bubbles. Not merely does it strike productivity and capital formation, but it also fosters investors to hold more risky assets to solve liquidity shortage under constrained borrowing capacity.

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Brockman, Paul, Dennis Y. Chung, and Xuemin (Sterling) Yan. "Block Ownership, Trading Activity, and Market Liquidity." Journal of Financial and Quantitative Analysis 44, no. 6 (October 8, 2009): 1403–26. http://dx.doi.org/10.1017/s0022109009990378.

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AbstractWe examine the impact of block ownership on the firm’s trading activity and secondary-market liquidity. Our empirical results show that block ownership takes potential trading activity off the table relative to a diffuse ownership structure and impairs the firm’s market liquidity. These adverse liquidity effects disappear, however, once we control for trading activity. Our findings suggest that block ownership is detrimental to the firm’s market liquidity because of its adverse impact on trading activity—a real friction effect. After controlling for this real friction effect, we find little evidence that block ownership has a negative impact on informational friction. Our results suggest that the relative lack of trading, and not the threat of informed trading, explains the inverse relation between block ownership and market liquidity.

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ROCHETEAU, GUILLAUME, and PIERRE-OLIVIER WEILL. "Liquidity in Frictional Asset Markets." Journal of Money, Credit and Banking 43 (September 23, 2011): 261–82. http://dx.doi.org/10.1111/j.1538-4616.2011.00435.x.

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Mertens, Karel, and Morten O. Ravn. "Leverage and the Financial Accelerator in a Liquidity Trap." American Economic Review 101, no. 3 (May 1, 2011): 413–16. http://dx.doi.org/10.1257/aer.101.3.413.

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We show that the financial accelerator may be very large in a liquidity trap. We study a sticky price model with real estate and a financial friction specified as a collateral constraint. Expectations can lead the economy to a self-fulfilling liquidity trap equilibrium where the lower bound on the nominal interest rate binds. We model these equilibria as stochastic sunspots. As in the Great Depression, a liquidity trap entails house price depreciation and potentially large output losses. Higher leverage implies much larger output losses but at the same time rules out the existence of short-lived liquidity traps.

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Rossi, Marco. "Realized Volatility, Liquidity, and Corporate Yield Spreads." Quarterly Journal of Finance 04, no. 01 (March 2014): 1450004. http://dx.doi.org/10.1142/s2010139214500049.

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I propose a friction measure of bond round-trip liquidity costs that is robust to outliers and accounts for the idiosyncratic information behind trading decisions. Particularly effective with investment-grade bonds, the proposed measure displays properties consistent with the credit risk puzzle. Using transactions from January 2004 to December 2011, I find that liquidity costs display a strong correlation with credit conditions and peaked during the sub-prime crisis. After controlling for equity volatility with high-frequency measures, liquidity costs explain a substantial fraction of the variation in the yield spreads of highly rated bonds, but become less important for speculative-grade bonds.

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Lagos, Ricardo, Guillaume Rocheteau, and Randall Wright. "Liquidity: A New Monetarist Perspective." Journal of Economic Literature 55, no. 2 (June 1, 2017): 371–440. http://dx.doi.org/10.1257/jel.20141195.

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This essay surveys the new monetarist approach to liquidity. Work in this literature strives for empirical and policy relevance, plus rigorous foundations. Questions include: What is liquidity? Is money essential in achieving desirable outcomes? Which objects can or should serve in this capacity? When can asset prices differ from fundamentals? What are the functions of commitment and collateral in credit markets? How does money interact with credit and intermediation? What can and should monetary policy do? The research summarized emphasizes the micro structure of frictional transactions, and studies how institutions like monetary exchange, credit arrangements, or intermediation facilitate the exchange process. (JEL E24, E31, E42, E44, E52, G10, G21)

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Son, Kyung-Woo, and Sang-Su Kim. "Liquidity Discount Value of ITM Option." Journal of Derivatives and Quantitative Studies 22, no. 4 (November 30, 2014): 699–722. http://dx.doi.org/10.1108/jdqs-04-2014-b0005.

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KOSPI 200 index option market is one of the markets which is perfectly liquid in the world. While ATM options and OTM options are liquid, ITM options are not. This paper derives LDV (liquidity discount value) from the ITM options by using the no-arbitrage condition of synthetic futures considering market friction. In this paper, we show that theoretically derived LDV is related to trading volume as standard proxy of liquidity measure and LDV in ITM options exhibit a U-shaped pattern across moneyness. Other findings are that the expected returns from the synthetic futures arbitrage trading considering liquidity premium exhibit a U-shaped pattern across moneyness and it depends on the maturity. This means that the longer days remaining to expiration date, the greater the incentive for arbitrage trading.

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Narasimhan, M. S., and Shalu Kalra. "The Impact of Derivative Trading on the Liquidity of Stocks." Vikalpa: The Journal for Decision Makers 39, no. 3 (July 2014): 51–66. http://dx.doi.org/10.1177/0256090920140304.

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Liquidity is an important factor for smooth trading for all assets including equities traded in the stock markets. Stock exchanges enable buyers and sellers to come together for transaction and in the process reduce the search cost and friction. Higher liquidity motivates more investors to participate in the stock market. Introduction of derivatives of the underlying stock increases the opportunity set available to investors and hence affect the liquidity of the underlying stock. This study examines the impact of derivative trading on the liquidity of underlying stock using price impact measure of liquidity. The price impact measure of liquidity, which actually measures illiquidity, is given by the average daily ratio of absolute return of the stock to the daily volume over a period of time. The advantage of this measure is that it is based on the observed price changes associated with trades. Two time periods have been chosen to examine the short-term and long-term impact of derivative listing on liquidity of underlying stocks. The first time period is one month pre- and post-listing and the second time period is one year pre- and post-listing. The results of this study show a shift in the volume from cash market to derivative market, decline in the number of trades, and lower volatility after the introduction of derivative trading. The illiquidity of the stocks also increased in the short run after the introduction of derivative trading and this is definitely not a desirable outcome of introduction of derivative trading. The sample has been divided into four quartiles on the basis of pre-liquidity levels to examine whether the change in liquidity is affected by the pre liquidity levels of the underlying stock. The results show that the impact of derivative trading on long-term liquidity of the market depends on the level of liquidity prior to the introduction of derivative trading. They also show an improvement in long-term liquidity after derivative trading when the liquidity of stocks prior to derivative trading was not high. In other words, derivative listing improved the liquidity of illiquid stocks significantly and served one of the basic objectives of risk management. On the other hand, long-term liquidity was marginally affected if the stocks were already liquid and it is not a matter of concern.

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Herrenbrueck, Lucas. "Frictional asset markets and the liquidity channel of monetary policy." Journal of Economic Theory 181 (May 2019): 82–120. http://dx.doi.org/10.1016/j.jet.2019.02.003.

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Subramaniam, Ravichandran K., Shyamala Dhoraisingham Samuel, and Sakthi Mahenthiran. "Liquidity Implications of Corporate Social Responsibility Disclosures: Malaysian Evidence." Journal of International Accounting Research 15, no. 1 (July 1, 2015): 133–53. http://dx.doi.org/10.2308/jiar-51204.

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ABSTRACTThe study examines the association between the different types of blockholdings, the levels of corporate social responsibility (CSR) disclosure, and liquidity of shares traded in Malaysian public listed companies (PLCs) on Bursa Malaysia. The sample consists of 194 most actively traded PLCs for the year 2009. A CSR index was constructed using the criteria used by a leading newspaper that provides an annual CSR award. We suggest that such CSR awards help legitimize the business activities of PLCs in the eyes of a government promoting sustainable business practices. The study finds that while insider blockholdings increases the trading friction and reduces liquidity, the nongovernmental institutional blockholdings improve the liquidity of shares traded on Bursa Malaysia. Moreover, the government institutional blockholdings interacts with the CSR disclosure levels to affect the liquidity of the shares traded. These findings make important contributions to emerging capital markets where government regulations incentivize CSR disclosures and the involvement of institutional investors in the governance of PLCs are the norm.Data Availability: The authors are willing to share the data for use by others in extending or replicating results reported in their articles (send request to Ms. Dhoraisingham at: shymala.dhoraisingam@monash.edu).

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Mala, Chajar Matari Fath, Muhammad Nadratuzzaman Hosen, and Mohammad Nur Rianto Al Arif. "The Response of Financial Performance to The Market Power of Islamic Banking in Indonesia." Signifikan: Jurnal Ilmu Ekonomi 11, no. 2 (October 6, 2022): 415–24. http://dx.doi.org/10.15408/sjie.v11i2.26777.

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market power of Islamic banking in Indonesia. This study contributes to filling the gap in the literature by combining the variables under the analysis of impulse response friction (IRF) about the relationship between market power, efficiency, liquidity, profitability, and stability. The data of this study covered Islamic banking in Indonesia from the period January 2010 to 2019 and used IRF from the VAR/VECM panel. This study found that shock/innovation of market power of Islamic banking in Indonesia is responded positively by efficiency, liquidity, and profitability. Meanwhile, financial stability responds negatively to shock/innovation of market power. These findings suggest that innovation in market power in Indonesian Islamic banking will lead to an increase in efficiency, liquidity, and profitability. This result poses a dilemma because competition increases stability but reduces efficiency, liquidity, and profitability. The balance between market power and stability at the macro and industrial levels becomes crucial because it is necessary to maintain the financial system’s stability and national economic growth.How to Cite:Mala, C. M. F., Hosen, M. N., & Al Arif, M. N. R. (2022). The Response of Financial Performance to The Market Power of Islamic Banking in Indonesia. Signifikan: Jurnal Ilmu Ekonomi, 11(2), 415-424. https://doi.org/10.15408/sjie.v11i2.26777.JEL Classification: G18, G21, G28

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Kurlat, Pablo. "Lemons Markets and the Transmission of Aggregate Shocks." American Economic Review 103, no. 4 (June 1, 2013): 1463–89. http://dx.doi.org/10.1257/aer.103.4.1463.

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I study a dynamic economy featuring adverse selection in asset markets. Borrowing constrained entrepreneurs sell past projects to finance new investment, but asymmetric information creates a lemons problem. I show that this friction is equivalent to a tax on financial transactions. The implicit tax rate responds to aggregate shocks, generating amplification in the response of investment and cyclical variation in liquidity. (JEL D82, D92, E32, E44, G31, L15)

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Bandi, Federico M., Aleksey Kolokolov, Davide Pirino, and Roberto Renò. "Zeros." Management Science 66, no. 8 (August 2020): 3466–79. http://dx.doi.org/10.1287/mnsc.2019.3527.

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Asset prices can be stale. We define price staleness as a lack of price adjustments yielding zero returns (i.e., zeros). The term idleness (respectively, near idleness) is, instead, used to define staleness when trading activity is absent (respectively, close to absent). Using statistical and pricing metrics, we show that zeros are a genuine economic phenomenon linked to the dynamics of trading volume and, therefore, liquidity. Zeros are, in general, not the result of institutional features, like price discreteness. In essence, spells of idleness or near idleness are stylized facts suggestive of a key, omitted market friction in the modeling of asset prices. We illustrate how accounting for this friction may generate sizable risk compensations in short-dated option returns. This paper was accepted by Kay Giesecke, finance.

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Moon, Vicki. "Halloysite behaving badly: geomechanics and slope behaviour of halloysite-rich soils." Clay Minerals 51, no. 3 (June 2016): 517–28. http://dx.doi.org/10.1180/claymin.2016.051.3.09.

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AbstractHalloysite-rich soils derived fromin situweathering of volcanic materials support steep stable slopes, but commonly fail under triggers of earthquakes or rainfall. Resulting landslides are slideflow processes, ranging from small translational slides to larger rotational failures with scarps characteristic of sensitive soils. Remoulding of failed materials results in high-mobility flows with apparent friction angles of 10–16°. The materials characteristically have high peak-friction angles (∼25– 37°), low cohesion (∼12–60 kN m−2) and plasticity ( plasticity index ∼10–48%), and low dry bulk density (∼480–1,080 kg m−3) with small pores due to the small size of the halloysite minerals. They remain saturated under most field conditions, with liquidity indexes frequently >1. Remoulded materials have limited cohesion (<5 kN m−2) and variable residual friction angles (15°–35°). Halloysite mineral morphology affects the rheology of remoulded suspensions: tubular minerals have greater viscosity and undrained shear strength than spherical morphologies.

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