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Liquidity Risk and Banks’ Bidding Behavior: Evidence from the Global Financial Crisis

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Abstract

Even in countries that were not directly hit by the global financial crisis and where the banking system had a relatively strong liquidity position, there has been a negative spiral between the market and funding liquidity. The authors illustrate this on a case study of the Czech banking system. They construct indices of market and funding liquidity using daily market data, including data on banks’ bidding behavior in repo operations of the Czech National Bank. They find some evidence of a negative feedback effect between market and funding liquidity, especially after the collapse of Lehman Brothers in September 2008.

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Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

Volume (Year): 59 (2009)
Issue (Month): 6 (December)
Pages: 577-592

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Handle: RePEc:fau:fauart:v:59:y:2009:i:6:p:577-592

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Keywords: funding liquidity; market liquidity; global financial crisis;

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  1. Kjell G. Nyborg, 2004. "Multiple Unit Auctions and Short Squeezes," Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 545-580.
  2. Heiko Hesse & Nathaniel Frank & Brenda González-Hermosillo, 2008. "Transmission of Liquidity Shocks," IMF Working Papers 08/200, International Monetary Fund.
  3. Judit Páles & Lóránt Varga, 2008. "Trends in the liquidity of Hungarian financial markets – What does the MNB’s new liquidity index show?," MNB Bulletin, Magyar Nemzeti Bank (the central bank of Hungary), vol. 3(1), pages 44-51, April.
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