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Liquidity and financial cycles

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Author Info
Tobias Adrian
Hyun Song Shin

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Abstract

In a financial system where balance sheets are continuously marked to market, asset price changes show up immediately in changes in net worth, and elicit responses from financial intermediaries, who adjust the size of their balance sheets. We document evidence that marked to market leverage is strongly procyclical. Such behaviour has aggregate consequences. Changes in aggregate balance sheets for intermediaries forecast changes in risk appetite in financial markets, as measured by the innovations in the VIX index. Aggregate liquidity can be seen as the rate of change of the aggregate balance sheet of the financial intermediaries.

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Publisher Info
Paper provided by Bank for International Settlements in its series BIS Working Papers with number 256.

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Length: 38 pages
Date of creation: Jul 2008
Date of revision:
Handle: RePEc:bis:biswps:256

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Related research
Keywords: financial cycle; financial intermediation; leverage; liquidity;

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  1. Eric Wong & Cho-Hoi Hui, 2009. "A Liquidity Risk Stress-Testing Framework with Interaction between Market and Credit Risks," Working Papers 0906, Hong Kong Monetary Authority. [Downloadable!]
  2. Robert J Shiller, 2007. "Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Models," Levine's Bibliography 122247000000001682, UCLA Department of Economics. [Downloadable!]
  3. Masazumi Hattori & Hyun Song Shin, 2007. "The Broad Yen Carry Trade," IMES Discussion Paper Series 07-E-19, Institute for Monetary and Economic Studies, Bank of Japan. [Downloadable!]
  4. Minford, Patrick, 2009. "The Banking Crisis - A Rational Interpretation," Cardiff Economics Working Papers E2009/10, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
  5. Andrew K. Rose & Mark M. Spiegel, 2009. "Cross-Country Causes and Consequences of the 2008 Crisis: International Linkages and American Exposure," NBER Working Papers 15358, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Shiller, Robert J., 2007. "Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Economic Models," Working Papers 29, Yale University, Department of Economics. [Downloadable!]
  7. Ramón Adalid & Carsten Detken, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series 732, European Central Bank. [Downloadable!]
  8. Aikman, David & Alessandri, Piergiorgio & Eklund, Bruno & Gai, Prasanna & Kapadia, Sujit & Martin, Elizabeth & Mora, Nada & Sterne, Gabriel & Willison, Matthew, 2009. "Funding liquidity risk in a quantitative model of systemic stability," Bank of England working papers 372, Bank of England. [Downloadable!]
  9. Felix Geiger, 2009. "International Interest-Rate Risk Premia in Affine Term Structure Models," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 316/2009, Department of Economics, University of Hohenheim, Germany. [Downloadable!]
  10. Mathias Hoffmann & Thomas Nitschka, 2009. "Securitization of Mortgage Debt, Asset Prices and International Risk Sharing," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  11. Kleopatra Nikolaou, 2009. "Liquidity (risk) concepts - definitions and interactions," Working Paper Series 1008, European Central Bank. [Downloadable!]
  12. Robert J. Shiller, 2007. "Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Models," Cowles Foundation Discussion Papers 1632, Cowles Foundation, Yale University. [Downloadable!]
  13. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York. [Downloadable!]
  14. Acharya, Viral V & Shin, Hyun Song & Yorulmazer, Tanju, 2007. "Fire Sales, Foreign Entry and Bank Liquidity," CEPR Discussion Papers 6309, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  15. Robert J. Shiller, 2007. "Low Interest Rates and High Asset Prices: An Interpretation in Terms of Changing Popular Economic Models," NBER Working Papers 13558, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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