Liquidity Risk and Funding Cost
2018
We propose and test a new channel that links
funding liquidityrisk and interest rates in short-term funding markets. Borrowers with high
liquidity riskare willing to pay a markup to lock in their funding, independent of
risk premiumsdemanded by lenders. We test the
channel usingunique trade-by-trade data and reveal systematic and persistent differences in borrowers'
funding liquidityrisk that lead to systematic and persistent heterogeneity in funding costs. Our results have important implications for financial stability, the transmission of monetary policy, and banks'
assetand
liability management.
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