Banks' Advantage in Hedging Liquidity Risk: Theory and Evidence from the Commercial Paper Market

This paper argues that banks have a unique ability to hedge against systematic liquidity shocks. Deposit inflows provide a natural hedge for loan demand shocks that follow declines in market liquidity. Consequently, one dimension of bank “specialness” is that banks can insure firms against systematic declines in market liquidity at lower cost than other financial institutions. We provide supporting empirical evidence from the commercial paper (CP) market. When market liquidity dries up and CP rates rise, banks experience funding inflows, allowing them to meet increased loan demand from borrowers drawing funds from pre-existing commercial paper backup lines without running down their holding of liquid assets. Moreover, the supply of cheap funds is sufficiently large so that pricing on new lines of credit actually falls as market spreads widen.

Rebels, Conformists, Contrarians and Momentum Traders

We develop a model of optimal investment with two types of agents with different beliefs about the market dynamics. Market conformists agree with the true log-normal price distribution and rebels believe in price predictability. Depending on their exact beliefs, the rebels may follow either a momentum or a contrarian strategy. It is difficult to detect rebels' beliefs that are not far-fetched from the market perspective. The long-run investment portfolios of both conformist and rebels need not be biased towards equities.

How do Banks Manage Liquidity Risk? Evidence from Equity and Deposit Markets in the Fall of 1998

We report evidence from the equity market that unused loan commitments expose banks to systematic liquidity risk, especially during crises such as the one observed in the fall of 1998. We also find, however, that banks with higher levels of transactions deposits had lower risk during the 1998 crisis than other banks. These banks experienced large inflows of funds just as they were needed -- when liquidity demanded by firms taking down funds from commercial paper backup lines of credit peaked. Our evidence suggests that combining loan commitments with deposits mitigates liquidity risk, and that this deposit-lending synergy is especially powerful during period of crises as nervous investors move funds into their banks.

Managing Bank Liquidity Risk: How Deposit-Loan Synergies Vary with Market Conditions

Liquidity risk in banking has been attributed to transactions deposits and their potential to spark runs or panics. We show instead that transactions deposits help banks hedge liquidity risk from unused loan commitments. Bank stock-return volatility increases with unused commitments, but the increase is smaller for banks with high levels of transactions deposits. This deposit-lending risk management synergy becomes more powerful during periods of tight liquidity, when nervous investors move funds into their banks. Our results reverse the standard notion of liquidity risk at banks, where runs from depositors had been seen as the cause of trouble.

36 th IAMPS Split

ABSTRACT Making organizational changes is a serious challenge for everyone who is in one wa

Market selection of constant proportions investment strategies in continuous time

This paper studies the wealth dynamics of investors holding self-financing portfolios in a continuous-time model of a financial market. Asset prices are endogenously determined by market clearing. We derive results on the asymptotic dynamics of the wealth distribution and asset prices for constant proportions investment strategies. This study is the first step towards a theory of continuous-time asset pricing that combines concepts from mathematical finance and economics by drawing on evolutionary ideas

Intraday rallies and crashes : spillovers of trading halts

This paper analyses a set of intraday rally and crash events at the firm level during the single stock circuit breaker (SSCB) program, and documents the cross-sectional spillover effects of such events on non-halted stocks. We test whether such major price jumps, and subsequent trading halts, affect related stocks through the destabilizing arbitrage channel. We find that extreme price movements that trigger the circuit breakers at the firm level are accompanied by a massive surge in volume, spread and short-term volatility, which gradually revert back to normal. Speculative strategies of arbitrageurs such as momentum and pairs trading cause cross-sectional spillovers in volume and volatility during the trading halt

Adaptive pairs trading strategy performance in Turkish derivatives exchange with the companies listed on Istanbul stock exchange

Due to copyright restrictions, the access to the full text of this article is only available via subscription.We implemented model-driven statistical arbitrage strategies in Turkish equities market. Trading signals are generated by optimized parameters of distance method. When the trade in signal is triggered by the model, market-neutral portfolio is created by long in the synthetic ETF, which is based on constrained least squares regression of selected Istanbul Stock Exchange stocks and short in Turkish Derivatives Exchange (Turkdex) index futures contract. We performed pairs trading strategy based on a comparative mean reversion of asset prices with daily data over the period February 2005 through July 2011 in Istanbul Stock Exchange (ISE) and Turkdex. We constructed a hypothetical ISE30 ETF Index on a daily basis in order to originate pairs trading strategy with Turkdex. Because of the leverage rule of (1–10) index futures contracts, we had to evaluate spot stock pairs formation with futures contracts pairs strategy. The results indicate that applied pairs strategy produced overall returns of 901 per cent during the investment period, whereas naive strategy (buy and hold ISE-30 index) return for the same period was 111 per cent. Similar outperformance was observed in the Sharpe and Sortino ratios