Abstract
The celebrated author Peter Bernstein explained in his book Capital Ideas: The Improbable Origins of Modern Wall Street, “Without the stock market, the market for corporate ownership would be like the market for houses. Agents have to advertise or use some cumbersome method of finding the other side of the deal. Real estate agents earn commissions of 6% or more, while the commission on a typical stock transaction is less than 1%. After the house has been sold, only the principles and their close friends know what the price was.”1 The increased marketability of financial instruments and the transferability of risks have been one of the major features of the modernization of the financial system and our increased reliance on a liquid market for smooth operation of the financial system.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
Notes
P. L. Bernstein, 2005, Capital Ideas: The Improbable Origins of Modern Wall Street, Hoboken, NJ: John Wiley & Sons.
V. W. Fang, T. H. Foe, and S. Tice, 2009, “Stock Market Liquidity and Firm Value”, Journal of Financial Economies, Vol. 94, pp. 150–169.
Y. Amihud and H. Mendelson, 1991, “Liquidity, Asset Prices and Financial Policy”, Financial Analyst Journal, Vol. 47, No. 6, pp. 55–66.
K. Balakrishnan, M. B. Billings, B. Kelly, and A. Ljungqvist, 2014, “Shaping Liquidity: On the Causal Effects of Voluntary Disclosures”, The Journal of Finance, Vol. 69, No. 5, pp. 2237–2278.
N. Gârleanu and L. H. Pedersen, 2007, “Search-and-Matching Financial Markets: Liquidity and Risk Management”, AEA Papers and Proceedings, Vol. 97, No. 2, pp. 193–197.
A. Shleifer and R. Vishny, 2011, “Fire Sales in Finance and Macroeconomics”, Journal of Economic Perspectives, Vol. 25, No. 1, pp. 29–48.
Fire sales are not limited to crisis periods. For example, poorly performing mutual funds without significant cash reserves may also be forced to sell holdings quickly. Harvard University professors Joshua Coval and Eric Stafford looked at the effect on the drop in stock prices when mutual funds with holdings of a particular stock are forced to sell due to investor withdrawals. See J. Coval and E. Stafford, 2007, “Asset Fire Sales (and Purchases) in Equity Markets”, Journal of Financial Economics, Vol. 86, pp. 479–512.
Z. He, I. G. Khang, and A. Krishnamurthy, 2010, “Balance Sheet Adjustments during the 2008 Crisis”, International Monetary Fund Economic Review, Vol. 58, pp. 118–156.
Empirical research showed that funding liquidity and market liquidity are different but related concepts. Reduced funding liquidity can cause market liquidity and vice versa. See M. K. Brunnermeier and L. H. Pedersen, 2009, “Market Liquidity and Funding Liquidity”, Review of Financial Studies, Vol. 22, No. 6, pp. 2201–2238.
The discussion and examples provided in the sections titled “The liquidity coverage ratio” and “The net stable funding ratio” are from similar discussions by John Hull, see John C. Hull, 2012, Risk Management and Financial Institutions, third ed., Hoboken, NJ: John Wiley & Sons.
W. Bagehot, [1873] 1999, Lombard Street: A Description of the Money Market, London: King report; New York: Wiley.
Copyright information
© 2015 Andria van der Merwe
About this chapter
Cite this chapter
van der Merwe, A. (2015). Financial Regulation and Liquidity Risk Management. In: Market Liquidity Risk. Palgrave Macmillan, New York. https://doi.org/10.1057/9781137389237_6
Download citation
DOI: https://doi.org/10.1057/9781137389237_6
Publisher Name: Palgrave Macmillan, New York
Print ISBN: 978-1-349-67863-1
Online ISBN: 978-1-137-38923-7
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)