Estimating financial institutions´ intraday liquidity risk: a Monte Carlo simulation approach
AbstractThe most recent financial crisis unveiled that liquidity risk is far more important and intricate than regulation have conceived. The shift from bank-based to market-based financial systems and from Deferred Net Systems to liquidity-demanding Real-Time Gross Settlement of payments explains some of the shortcomings of traditional liquidity risk management. Although liquidity regulations do exist, they still are in an early stage of development and discussion. Moreover, no all connotations of liquidity are equally addressed. Unlike market and funding liquidity, intraday liquidity has been absent from financial regulation, and has appeared only recently, after the crisis.This paper addresses the measurement of Large-Value Payment System´s intraday liquidity risk. Based on the generation of bivariate Poisson random numbers for simulating the minute-by-minute arrival of received and executed payments, each financial institution´s intraday payments time-varying volume and degree of synchrony (i.e. timing) is modeled. To model intraday payments´ uncertainty allows for (i) overseeing participants´ intraday behavior; (ii) assessing their ability to fulfill intraday payments at a certain confidence level; (iii) identifying participants non-resilient to changes in payments´ timing mismatches; (iv) estimating intraday liquidity buffers. Vis-à-vis the increasing importance of liquidity risk as a source of systemic risk, and the recent regulatory amendments, results are useful for financial authorities and institutions.
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Bibliographic InfoPaper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 009441.
Date of creation: 11 Apr 2012
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Payments Systems; Intraday; Liquidity Risk; Bivariate Poisson process; Monte Carlo Simulation; Liquidity Buffer; Oversight.;
Other versions of this item:
- Carlos León, 2012. "Estimating financial institutions’ intraday liquidity risk: a Monte Carlo simulation approach," Borradores de Economia 703, Banco de la Republica de Colombia.
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-02 (All new papers)
- NEP-BAN-2012-05-02 (Banking)
- NEP-CBA-2012-05-02 (Central Banking)
- NEP-CMP-2012-05-02 (Computational Economics)
- NEP-RMG-2012-05-02 (Risk Management)
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