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Liquidity Risk and Funding Cost

Author

Listed:
  • Alexander Bechtel
  • Angelo Ranaldo
  • Jan Wrampelmeyer
Abstract
We propose and test a new channel that links funding liquidity risk and interest rates in short-term funding markets. Borrowers with high liquidity risk are willing to pay a markup to lock in their funding, independent of risk premiums demanded by lenders. We test the channel using unique trade-by-trade data and reveal systematic an persistent differences in borrowers' funding liquidity risk 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' asset and liability management

Suggested Citation

  • Alexander Bechtel & Angelo Ranaldo & Jan Wrampelmeyer, 2019. "Liquidity Risk and Funding Cost," Working Papers on Finance 1903, University of St. Gallen, School of Finance, revised Aug 2020.
    • Handle: RePEc:usg:sfwpfi:2019:03
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    References listed on IDEAS

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    Cited by:

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    3. Sarmiento Paipilla, Miguel, 2024. "The Transmission of Non-Banking Liquidity Shocks to the Banking Sector," Other publications TiSEM c8f68d8f-0035-4529-95af-1, Tilburg University, School of Economics and Management.
    4. Filippou, Ilias & Maurer, Thomas A. & Pezzo, Luca & Taylor, Mark P., 2024. "Importance of transaction costs for asset allocation in foreign exchange markets," Journal of Financial Economics, Elsevier, vol. 159(C).

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    More about this item

    Keywords

    Funding liquidity risk; short-term interest rates; risk premiums; funding costs; interbank market;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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