The Price of Liquidity: Bank Characteristics and Market Conditions

49 Pages Posted: 3 Mar 2008

See all articles by Falko Fecht

Falko Fecht

Frankfurt School of Finance & Management

Kjell G. Nyborg

University of Zurich - Department of Banking and Finance; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Jörg Rocholl

ESMT European School of Management and Technology

Multiple version iconThere are 4 versions of this paper

Date Written: February 29, 2008

Abstract

We test for imperfections in the market for liquidity using price data at the individual bank level in the primary market in the euro zone. Unique to this paper, we also have data on individual banks' reserve positions relative to what they are required to hold with the central bank, thus allowing us to gauge the extent to which a bank is short or long liquidity. We find evidence that liquidity squeezes occur from time to time. A greater imbalance in positions across banks is associated with a rise in the relative price of liquidity. This imbalance effect is felt more keenly by a bank the shorter and smaller it is, suggesting that smaller banks are more vulnerable to liquidity squeezes. Controlling for a variety of factors, we also find that larger banks pay less for liquidity than do smaller banks, supporting the view that larger banks have better access to the interbank market. Contrary to what one might expect, banks in formal liquidity networks do not pay less.

Keywords: Liquidity, Banking, Short Squeezes, Money Markets, Repo Auctions

JEL Classification: G1, G21, E5, D44

Suggested Citation

Fecht, Falko and Nyborg, Kjell G. and Rocholl, Joerg, The Price of Liquidity: Bank Characteristics and Market Conditions (February 29, 2008). EFA 2008 Athens Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1099827 or http://dx.doi.org/10.2139/ssrn.1099827

Falko Fecht

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Kjell G. Nyborg

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland
+41 (0)44 634 2980 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Joerg Rocholl (Contact Author)

ESMT European School of Management and Technology ( email )

Schlossplatz 1
Berlin
Germany

HOME PAGE: http://www.esmt.org/en/159244

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