IDEAS home Printed from https://ideas.repec.org/p/iis/dispap/iiisdp318.html
   My bibliography  Save this paper

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

Author

Listed:
  • Aidan Corcoran

    (Institute for International Integration Studies, Trinity College Dublin)

Abstract

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.

Suggested Citation

  • Aidan Corcoran, 2010. "Global Funding Liquidity, Equity Returns and Crash Risk: Implications for Monetary Policy," The Institute for International Integration Studies Discussion Paper Series iiisdp318, IIIS, revised Feb 2010.
    • Handle: RePEc:iis:dispap:iiisdp318
    as

    Download full text from publisher

    File URL: https://www.tcd.ie/triss/assets/PDFs/iiis/iiisdp318.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    2. Eugene F. Fama & Kenneth R. French, 1998. "Value versus Growth: The International Evidence," Journal of Finance, American Finance Association, vol. 53(6), pages 1975-1999, December.
    3. Hanno Lustig & Nikolai Roussanov & Adrien Verdelhan, 2011. "Common Risk Factors in Currency Markets," The Review of Financial Studies, Society for Financial Studies, vol. 24(11), pages 3731-3777.
    4. Tobias Adrian & Erkko Etula & Hyun Song Shin, 2009. "Risk appetite and exchange Rates," Staff Reports 361, Federal Reserve Bank of New York.
    5. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
    6. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-836, July.
    7. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 418-437, July.
    8. 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.
    9. 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, February.
    10. Isabelle Huault & V. Perret & S. Charreire-Petit, 2007. "Management," Post-Print halshs-00337676, HAL.
    11. 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.
    12. Detken, Carsten & Adalid, Ramón, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series 732, European Central Bank.
    13. Johnson, Timothy C., 2008. "Volume, liquidity, and liquidity risk," Journal of Financial Economics, Elsevier, vol. 87(2), pages 388-417, February.
    14. Nicolae Gârleanu & Lasse Heje Pedersen, 2007. "Liquidity and Risk Management," American Economic Review, American Economic Association, vol. 97(2), pages 193-197, May.
    15. 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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cristina Cella & Andrew Ellul & Mariassunta Giannetti, 2013. "Investors' Horizons and the Amplification of Market Shocks," The Review of Financial Studies, Society for Financial Studies, vol. 26(7), pages 1607-1648.
    2. Stefan Nagel, 2013. "Empirical Cross-Sectional Asset Pricing," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 167-199, November.
    3. Nina Karnaukh & Angelo Ranaldo & Paul Söderlind, 2015. "Understanding FX Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 28(11), pages 3073-3108.
    4. Ruenzi, Stefan & Ungeheuer, Michael & Weigert, Florian, 2020. "Joint Extreme events in equity returns and liquidity and their cross-sectional pricing implications," Journal of Banking & Finance, Elsevier, vol. 115(C).
    5. Sean A. Anthonisz & Tālis J. Putniņš, 2017. "Asset Pricing with Downside Liquidity Risks," Management Science, INFORMS, vol. 63(8), pages 2549-2572, August.
    6. Ben Ammar, Semir & Eling, Martin & Milidonis, Andreas, 2018. "The cross-section of expected stock returns in the property/liability insurance industry," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 292-321.
    7. Cakici, Nusret & Zaremba, Adam, 2022. "Salience theory and the cross-section of stock returns: International and further evidence," Journal of Financial Economics, Elsevier, vol. 146(2), pages 689-725.
    8. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, September.
    9. Lasse Pedersen, 2009. "When Everyone Runs for the Exit," International Journal of Central Banking, International Journal of Central Banking, vol. 5(4), pages 177-199, December.
    10. Arvind Krishnamurthy, 2010. "Amplification Mechanisms in Liquidity Crises," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 1-30, July.
    11. Ben Ammar, Semir & Eling, Martin & Milidonis, Andreas, 2015. "Asset Pricing of Financial Insitutions: The Cross-Section of Expected Stock Returns in the Property/Liability Insurance Industry," Working Papers on Finance 1516, University of St. Gallen, School of Finance.
    12. Bams, Dennis & Honarvar, Iman, 2021. "VIX and liquidity premium," International Review of Financial Analysis, Elsevier, vol. 74(C).
    13. Charlotte Christiansen & Maik Schmeling & Andreas Schrimpf, 2012. "A comprehensive look at financial volatility prediction by economic variables," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(6), pages 956-977, September.
    14. Amit Goyal, 2012. "Empirical cross-sectional asset pricing: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 3-38, March.
    15. Tyler Muir & Erkko Etula & Tobias Adrian, 2011. "Broker-Dealer Leverage and the Cross-Section of Stock Returns," 2011 Meeting Papers 1448, Society for Economic Dynamics.
    16. Auer, Benjamin R. & Rottmann, Horst, 2019. "Have capital market anomalies worldwide attenuated in the recent era of high liquidity and trading activity?," Journal of Economics and Business, Elsevier, vol. 103(C), pages 61-79.
    17. Skočir, Matevž & Lončarski, Igor, 2018. "Multi-factor asset pricing models: Factor construction choices and the revisit of pricing factors," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 55(C), pages 65-80.
    18. Khandani, Amir E. & Lo, Andrew W., 2011. "What happened to the quants in August 2007? Evidence from factors and transactions data," Journal of Financial Markets, Elsevier, vol. 14(1), pages 1-46, February.
    19. Tobias Adrian & Erkko Etula, 2010. "Funding liquidity risk and the cross-section of stock returns," Staff Reports 464, Federal Reserve Bank of New York.
    20. Committee, Nobel Prize, 2013. "Understanding Asset Prices," Nobel Prize in Economics documents 2013-1, Nobel Prize Committee.

    More about this item

    Keywords

    Global excess liquidity; monetary policy; foreign exchange.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iis:dispap:iiisdp318. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Maeve (email available below). General contact details of provider: https://edirc.repec.org/data/cetcdie.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.