Liquidity Risk and Funding Cost
Series
School of Finance Workingpaper Series
Type
working paper
Date Issued
2019-05-14
Author(s)
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.
Language
English
Keywords
Funding liquidity risk
short-term interest rates
risk premiums
funding costs
interbank market
HSG Classification
contribution to scientific community
HSG Profile Area
SOF - System-wide Risk in the Financial System
Volume
2019
Number
03
Pages
70
Subject(s)
Eprints ID
257072
File(s)![Thumbnail Image]()
open.access
Name
19_03_Ranaldo et al_Liquidity Risk and Funding Cost.pdf
Size
2.2 MB
Format
Adobe PDF
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