15 research outputs found
An Analysis of the Systemic Risks Posed by Fannie Mae and Freddie Mac and an Evaluation of the Policy Options for Reducing those Risks
Market liquidity and funding liquidity
We provide a model that links an asset's market liquidity; i.e., the ease with which it is traded; and traders' funding liquidity, i.e. the ease with which they can obtain funding. Traders provide market liquidity, and their ability to do so depends on their availability of funding. Conversely, traders' funding, i.e., their capital and the margins they are charged, depend on the assets' market liquidity. We show that, under certain conditions, margins are destabilizing and market liquidity and funding liquidity are mutually reinforcing, leading to liquidity spirals. The model explains the empirically documented features that market liquidity (i) can suddenly dry up, (ii) has commonality across securities, (iii) is related to volatility, (iv) is subject to "flight to quality", and (v) comoves with the market, and it provides new testable predictions
Tying Bank Regulation to Banks’ Risk-Return Trade-Offs Following the Financial Crisis: Holding Congress and its Regulatory Apparatus Accountable
is given to the source. Deciphering the Liquidity and Credit Crunch 2007-08
Goodwin, Martin Schmalz, and Hao Wu provided excellent research assistance. I am grateful for financial support from the Alfred P. Sloan Foundation. The views expressed herein are those of the author(s