This study intends to analyse the credibility of the Hungarian exchange rate regime preceding and during the Russian stock market crisis and devaluation (in 1998). Throughout the Paper the comparison ...with the similar regime in Poland is stressed. The basic tool applied is a measure of market imperfections, more precisely deviations from covered interest rate parity. The size, sign and dynamics of these deviations provide insight into the expectations of market participants. These in turn yield conclusions concerning the credibility and vulnerability of the regimes. Policy implications also follow.
We develop the principal component analysis (PCA) approach to systematic liquidity measurement by introducing moving and expanding estimation windows. We evaluatethese methods along with traditional ...estimation techniques (full sample PCA and market average) in terms of ability to explain (1) cross-sectional stock liquidity and (2) cross-sectional stock returns. For several traditional liquidity measures our results suggest an expanding window specification for systematic liquidity estimation. However, for price impact liquidity measures we find support for a moving window specification. The market average proxy of systematic liquidity produces the same degree of commonality, but does not have the same ability to explain stock returns as the PCA-based estimates.
This paper aims to stress the importance of market liquidity for the stability of the financial system, emphasizing the pivotal role played by liquidity risk in the development of the current ...financial crisis, pointing out the flaws of regulation and supervision and stressing the need for their reform. We first investigate the evolution of the concept of liquidity and the nexus between the transformations of financial systems and their increased vulnerability to liquidity risks. Then we focus on the causes of the emergence of liquidity risk in the ongoing financial crisis. We point out two intertwined processes: firstly, the huge increase in financial assets stemming from the shift to an “originate-to-distribute” intermediation model; secondly, the growth of a parallel financial circuit. After this, we focus on the main lessons for regulation and supervision: first of all we address the case for adjustments to or reform of Basel 2 in view of the nexus between solvency and liquidity. Further crucial points relate to market liquidity and OTC markets, scale and scope of LLR function, architecture of supervisory authorities and perimeter of controls. Finally we stress the need for harmonization, or at least coordination, of national liquidity regimes, at least for cross-border groups.
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As recent experience all too clearly demonstrates, liquid markets do not exist for all financial assets at all times. In some respects, this can be thought of as a market failure. This paper ...addresses how best to promote asset market liquidity given this market failure, and the appropriate balance between the private and public sectors in establishing arrangements for dealing with liquidity problems. There are three main conclusions. First, improvements in the financial infrastructure – including arrangements for disclosure and post-trade processing – have a role to play in limiting the sharp rise in information asymmetries that can occur when conditions in financial markets are strained and at turning points in the financial cycle. Second, recent events have shown up shortcomings in the way that financial institutions manage their own liquidity, and these shortcomings need addressing. Third, it may be welfare-improving for the public sector to provide liquidity services when liquidity is strained. The central bank can smooth liquidity over the cycle, and the public sector can facilitate the change of ownership of assets from a troubled institution, which in extremis may include the public sector buying assets outright. If the public sector does actively provide liquidity services, then arrangements need to be put in place to ensure that the potential welfare gains from doing so are not undermined by financial institutions taking on greater risk than is warranted.
Research into computing resource markets has mainly considered the question of which market mechanism provides a fair resource allocation. It has not been discussed how a large variety of resource ...types influences the liquidity of resources in the market. Markets containing large numbers of buyers and sellers for heterogeneous resources suffer from a low likelihood of matching offers and requests (defined through contracts, SLAs). These markets are less attractive for traders because of the high risk of not being able to trade resources (liquidity). We suggest a solution that derives SLA templates from a large number of heterogeneous SLAs in the market, and, by using these templates instead of the original SLAs, facilitate SLA mapping (i.e. mapping of offers to requests). The usefulness of this approach is demonstrated through simulation results and a comparison with an alternative approach in which SLAs are predefined.
This paper focuses on the time series properties of the level of underpricing of IPO shares and volume of initial selling in Hong Kong equity market. Strong autocorrelation among the level of ...underpricing has been identified. Evidence suggests that the initial selling volume plays an important role in the relationship. The links between underpricing and clustering of IPOs within different industries are weak, suggesting the reasons for underpricing are rather related to the market liquidity than industry specific risk characteristics.
We consider a moral hazard setup wherein leveraged firms have incentives to take on excessive risks and are thus rationed when they attempt to borrow in order to meet liquidity shocks. The rationed ...firms can optimally pledge cash as collateral to borrow more, but in the process must liquidate some of their assets. Liquidated assets are purchased by non-rationed firms but their borrowing capacity is also limited by the moral hazard. The market-clearing price exhibits cash-in-the-market pricing and depends on the entire distribution of liquidity shocks in the economy. As moral hazard intensity varies, equilibrium price and level of collateral requirements are negatively related. However, compared to models where collateral requirements are exogenously specified, the endogenously designed collateral in our model has a stabilizing role on prices: For any given intensity of moral hazard problem, asset sales are smaller in quantity, and, in turn, equilibrium price is higher, when collateral requirements are optimally designed. This price-stabilizing role implies that the ex-ante debt capacity of firms is higher with collateral and thereby ex-post liability shocks are smaller. This stabilizes prices further, resulting in an important feedback: Collateral reduces the proportion of ex-ante rationed firms and thus leads to greater market participation. Our model provides an agency-theoretic explanation for some features of financial crises such as the linkage between market and funding liquidity and deep discounts observed in prices during crises that follow good times.
