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Systemic Liquidity Crisis with Dynamic Haircuts

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  • Sever, Can

Abstract

In this paper, using network tools, I analyse systemic impacts of liquidity shocks in interbank market in case of endogenous haircuts. Gai, Haldane and Kapadia (2011) introduce a benchmark for liquidity crisis following haircut shocks, and Gorton and Metrick (2010) reveal the evidence from 2007-09 crisis for increasing haircuts with banking panic. In the benchmark model, I endogenize and update haircuts dynamically during the period of stress. The results significantly differ from static haircut case. I show that the gap in the impacts of haircut shocks between dynamic and static haircuts is persistent for different experiments. I analyse the effects of connectivity, balance sheet and network positions of banks, and liquidity level and distribution on crisis. As well as aggregate and idiosyncratic shocks, by considering possible correlations on the asset sides of banks, I also introduce a shock hitting several banks at the same time. This study may be useful for policy makers to predict the consequences of liquidity shocks more accurately. The findings are also related to microprudential regulation on liquidity surcharge for systemically important financial institutions (SIFI's) and produce policy recommendations on minimum liquidity requirements.

Suggested Citation

  • Sever, Can, 2014. "Systemic Liquidity Crisis with Dynamic Haircuts," MPRA Paper 55602, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:55602
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    File URL: https://mpra.ub.uni-muenchen.de/55602/1/MPRA_paper_55602.pdf
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    References listed on IDEAS

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    1. Eve Chiapello & A. Hurand, 2011. "Contribution," Post-Print hal-00681170, HAL.
    2. Daniel Kapp & Marco Vega, 2014. "Real output costs of financial crises: A loss distribution approach," Cuadernos de Economía - Spanish Journal of Economics and Finance, Asociación Cuadernos de Economía, vol. 37(103), pages 13-28, Abril.
    3. giulia iori and Saqib Jafarey, 2001. "Interbank Lending, reserve requirements and systemic risk," Computing in Economics and Finance 2001 63, Society for Computational Economics.
    4. Soramäki, Kimmo & Bech, Morten L. & Arnold, Jeffrey & Glass, Robert J. & Beyeler, Walter E., 2007. "The topology of interbank payment flows," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 379(1), pages 317-333.
    5. Anand, Kartik & Gai, Prasanna & Marsili, Matteo, 2012. "Rollover risk, network structure and systemic financial crises," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1088-1100.
    6. Ghosal, Sayantan & Miller, Marcus & Thampanishvong, Kannika, 2010. "Delay and Haircuts in Sovereign Debt: Recovery and Sustainability," SIRE Discussion Papers 2010-17, Scottish Institute for Research in Economics (SIRE).
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    11. Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2007. "Network models and financial stability," Journal of Economic Dynamics and Control, Elsevier, vol. 31(6), pages 2033-2060, June.
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    More about this item

    Keywords

    systemic risk; liquidity risk; liquidity crisis; liquidity hoarding; random network; geometric network; dynamic haircut; liquidity surcharge; systemically important �nancial institution (SIFI);

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G1 - Financial Economics - - General Financial Markets
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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