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Global Funding Liquidity, Equity Returns and Crash Risk: Implications for Monetary Policy

  • Aidan Corcoran

    ()

    (Institute for International Integration Studies, Trinity College Dublin)

Monetary policy loosening and the associated impact on credit availability may have played a role in the present financial crisis. If such liquidity risk exists and is undiversifiable, then loose monetary policy should be associated with a risk premium. This paper tests for the existence of such a premium in US and global equity markets, in an asset pricing framework which accounts for endogeneity from equity prices to credit availability.

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File URL: http://www.tcd.ie/iiis/documents/discussion/pdfs/iiisdp318.pdf
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Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp318.

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Length: 29 pages
Date of creation: Feb 2010
Date of revision: Feb 2010
Handle: RePEc:iis:dispap:iiisdp318
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  1. Hui Guo & Christopher J. Neely & Jason Higbee, 2008. "Foreign Exchange Volatility Is Priced in Equities," Financial Management, Financial Management Association International, vol. 37(4), pages 769-790, December.
  2. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York.
  3. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  4. Nicolae B. Garleanu & Lasse H. Pedersen, 2007. "Liquidity and Risk Management," NBER Working Papers 12887, National Bureau of Economic Research, Inc.
  5. Lubos Pastor & Robert F. Stambaugh, 2001. "Liquidity Risk and Expected Stock Returns," NBER Working Papers 8462, National Bureau of Economic Research, Inc.
  6. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
  7. Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992. "Efficient Tests for an Autoregressive Unit Root," NBER Technical Working Papers 0130, National Bureau of Economic Research, Inc.
  8. Eugene F. Fama & Kenneth R. French, . "Value Versus Growth: The International Evidence," CRSP working papers 449, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  9. Hanno Lustig & Nikolai Roussanov & Adrien Verdelhan, 0. "Common Risk Factors in Currency Markets," Review of Financial Studies, Society for Financial Studies, vol. 24(11), pages 3731-3777.
  10. Adalid, Ramón & Detken, Carsten, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series 0732, European Central Bank.
  11. Andrew Ang & Robert J. Hodrick & Yuhang Xing & Xiaoyan Zhang, 2006. "The Cross-Section of Volatility and Expected Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 259-299, 02.
  12. Hyun Song Shin & Erkko Etula & Tobias Adrian, 2010. "Risk Appetite and Exchange Rates," 2010 Meeting Papers 311, Society for Economic Dynamics.
  13. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
  14. Johnson, Timothy C., 2008. "Volume, liquidity, and liquidity risk," Journal of Financial Economics, Elsevier, vol. 87(2), pages 388-417, February.
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