Arbitrageurs play an important role in keeping market prices close to their fundamental values by providing market liquidity. Most arbitrageurs however use leverage. When funding conditions worsen they are forced to reduce their positions. The resulting selling pressure depresses market prices, and in certain situations, pushes arbitrage spreads to levels exceeding many standard deviations. This phenomenon drove many century old financial institutions into bankruptcy during the 2007−2009 financial crisis. In this thesis, we provide empirical evidence and demonstrate analytically the effects of funding liquidity on arbitrage. We further discuss the implications for risk management. To conduct our empirical studies, we construct a novel Funding Liquidity Stress Index (FLSI) using principal components analysis. Its constituents are measures representing various funding channels. We study the relationship between the FLSI index and three di↵erent arbitrage strategies that we reproduce with real and daily transactional data. We show that the FLSI index has a strong explanatory power for changes in arbitrage spreads, and is an important source of contagion between various arbitrage strategies. In addition, we perform “event studies” surrounding events of changing margin requirements on futures contracts. The “event studies” provide empirical evidence supporting important assumptions and predictions of various theoretical work on market micro-structure. Next, we explain the mechanism through which funding liquidity affects arbitrage spreads. To do so, we study the liquidity risk premium in a market micro-structure framework where market prices are determined by the supply and demand of securities. We extend the model developed by Brunnermeier and Pedersen [BP09] to multiple periods and generalize their work by considering all market participants to be risk-averse. We further decompose the liquidity risk premium into two components: 1) a fundamental risk premium and 2) a systemic risk premium. The fundamental risk premium compensates market participants for providing liquidity in a security whose fundamental value is volatile, while the systemic risk premium compensates them for taking positions in a market that is vulnerable to funding liquidity. The first component is therefore related to the nature of the security while the second component is related to the fragility of the market micro-structure (such as leverage of market participants and margin setting mechanisms).

Arbitrageurs play an important role in keeping market prices close to their fundamental values by providing market liquidity. Most arbitrageurs however use leverage. When funding conditions worsen they are forced to reduce their positions. The resulting selling pressure depresses market prices, and in certain situations, pushes arbitrage spreads to levels exceeding many standard deviations. This phenomenon drove many century old financial institutions into bankruptcy during the 2007−2009 financial crisis. In this thesis, we provide empirical evidence and demonstrate analytically the effects of funding liquidity on arbitrage. We further discuss the implications for risk management. To conduct our empirical studies, we construct a novel Funding Liquidity Stress Index (FLSI) using principal components analysis. Its constituents are measures representing various funding channels. We study the relationship between the FLSI index and three di↵erent arbitrage strategies that we reproduce with real and daily transactional data. We show that the FLSI index has a strong explanatory power for changes in arbitrage spreads, and is an important source of contagion between various arbitrage strategies. In addition, we perform “event studies” surrounding events of changing margin requirements on futures contracts. The “event studies” provide empirical evidence supporting important assumptions and predictions of various theoretical work on market micro-structure. Next, we explain the mechanism through which funding liquidity affects arbitrage spreads. To do so, we study the liquidity risk premium in a market micro-structure framework where market prices are determined by the supply and demand of securities. We extend the model developed by Brunnermeier and Pedersen [BP09] to multiple periods and generalize their work by considering all market participants to be risk-averse. We further decompose the liquidity risk premium into two components: 1) a fundamental risk premium and 2) a systemic risk premium. The fundamental risk premium compensates market participants for providing liquidity in a security whose fundamental value is volatile, while the systemic risk premium compensates them for taking positions in a market that is vulnerable to funding liquidity. The first component is therefore related to the nature of the security while the second component is related to the fragility of the market micro-structure (such as leverage of market participants and margin setting mechanisms).

Cette thèse étudie les conditions d’accès des banques européennes au financement interbancaire non sécurisé entre 2006 et 2012. Elle contient trois essais empiriques explorant des micro-données relatives aux transactions interbancaires. La première étude empirique adopte une approche en termes de paires banque prêteuse/banque emprunteuse et montre que, une fois le risque de contrepartie et les imperfections de marché contrôlées, les banques ayant un risque de liquidité plus élevé paient une prime de taux d’intérêt. Nous montrons également que cette prime est augmentée par les banques disposant d’excès de liquidités, sans doute motivées par la thésaurisation ou des stratégies de “short-squeezing” des banques en besoin de liquidité. Cette étude souligne finalement l’imperfection du marché interbancaire et l’importance des diverses interventions de la BCE qui ont cherché à réduire le risque de liquidité des banques au cours de la crise. La seconde étude, par le biais d’un model 2P-FRM, explore empiriquement l’impact des relations de clientèle entre banques sur la structure de maturité de la dette interbancaire. Les résultats dévoilent que l’accès aux prêts interbancaires longs et non sécurisés est facilité par les relations durables avant et durant les périodes de stress. Cependant, lors des moments aigus de la crise suivant la chute de la banque Lehman, ces effets positifs des variables bilatérales de relations fortes, calculées comme la concentration des actifs sur une banque emprunteuse, ne sont pas là. La deuxième partie de notre modèle montre que la part en volume des crédits à terme est plus faible pour les couples de banques partenaires. Finalement, notre variable unilatérale de relation interbancaire, qui mesure la concentration du réseau d’emprunt de la banque prêteuse, s’avère impacter négativement les prêts à terme post-Lehman. Cela confirme l’hypothèse que le propre risque de refinancement court du prêteur peut être l’origine du gel post-Lehman des prêts interbancaires à terme. Finalement, le troisième essai explore le lien entre la segmentation du marché interbancaire et le noeud de corrélation des risques souverains/bancaires. En utilisant les changements des primes des CDS souverains et bancaires, nous proposons une mesure originale de corrélation partielle des spillovers souverains-banques, qui permet d’attribuer une direction pays-banques à la contagion. Les résultats montrent que ces spillovers accentuent la segmentation du marché monétaire Italien lors de la phase critique de la crise des dettes souveraines. De plus, l’étude montre que, même si l’impact pays d’origine/banques est important, la contagion venant d’autres souverains en crise est loin d’être négligeable. / This thesis studies European banks’ terms to access to unsecured interbank funding during the period 2006 to 2012. It contains three empirical essays exploring micro-data on interbank transactions. The first empirical study adopts a bank pair panel approach evidencing that, once counterparty risk and other market imperfections are controlled for, banks with higher funding liquidity risk (liquidity-short banks) pay an interest rate premium. The bank pair level analysis also permits to show that this premium is charged by liquidity-long banks, probably motivated by strategic short-squeezing or prudential hoarding purposes during the crisis. This study emphasizes the imperfection of interbank markets and the importance of theECB’s emergency interventions dedicated to dampening banks’ funding risk concerns. The second essay explores empirically the impact of relationship lending on the interbank debt maturity structure of banks by mean of a two-part fractional response model. The findings show that durable bilateral liquidity partnerships can positively impact the probability of contracting term loans before and during periods of acute stress. The positive effects of the bilateral relationship lending variable measured as asset-side concentration, is however, not straightforward, especially after the Lehman default. The second part of our model shows that the post-Lehman maturity shift is pronounced for partner banks. Finally, we find that our unilateral (lender level) relationship variable impacts negatively long term lending confirming the rollover risk viewpoint of the term interbank market freeze. Finally, the third essay investigates the link between interbank market segmentation and bank–sovereign risk nexus. Using bank and country CDS spread changes it suggests an original partial correlation based measurement of sovereign/bank spillovers providing us with a direction of contagion. Empirical findings from this part of the thesis evidence that bank-sovereign risk correlation is a significant source of fragmentation during the most acute phase of the sovereign debt crisis. Moreover, the study shows that, even if home country/bank ties impact seriously interbank market integration, the risk from other distressed countries is far from negligible.

In the first essay, I create a hedge fund informed trading measure (ITM) that separates information related trades from liquidity driven trades. The results indicate that ITM predicts future stock returns at the trade level, thus is associated with information. By aggregating the most informed trades at the stock level, I find that stocks heavily purchased by informed hedge funds earn a significant alpha. The results indicate that the ITM performs better than some previously documented measures and is robust to two different versions of the measure. The second essay exploits the expiring nature of hedge fund lockups to create a new, within-fund proxy of funding liquidity risk. When funds have lower funding liquidity risk, risk-adjusted performance improves and exposure to tail risk increases. We use fund fixed-effect, a placebo approach, and a regression discontinuity design to establish a link between funding liquidity risk and the ability of funds to capitalize on risky mispricing. The third essay explores hedge fund managers ability to identify and trade on stock mispricing opportunity. We refer to the amount of capital that are is locked up and refrained from redemption as the stable capital, and study how it affects stock mispricing. We find that when funds have more lockup capital, they are more likely to take mispricing risks. Taking all funds together, more stable capital in the industry is driving the reduction or even correction of market-wide stock mispricing. Underpriced stocks benefit more than overpriced stock from hedge funds stable capital.

This study examined the determinants of commercial bank liquidity in South Africa. The panel regression approach was used, applying panel data from twelve commercial banks over the period 2006 to 2016. A quantitative research method was used to investigate the relationship between bank liquidity and some microeconomic and bank-specific factors and between bank liquidity and selected macro-economic factors. The regression analysis for four liquidity ratios was conducted using the pooled ordinary least squares regression, fixed effects, random effects and the generalised methods of moments. However, the system generalised methods of moments approach was preferred over the other methods because it eliminated the problem of endogeneity. Results show that capital adequacy, size and gross domestic product have a positive and significant effect on liquidity. Loan growth and non-performing loans had a negative and significant effect on liquidity. Inflation had both a positive and a negative but an insignificant effect on liquidity. The study concluded that South African banks could enhance their liquidity positions by tightening their loan-underwriting criteria and credit policies. Banks should improve their credit risk management frameworks to be more prudent in their lending practices to improve the quality of the loan book to enhance liquidity. They also need to grow their capital levels by embarking on efficient revenue enhancements activities. Banks may also to look at their clients on an overall basis and not on transaction bases, and they need to improve non-interest revenue by introducing innovated products. The South African Reserve Bank could push for policies that might enhance capitalisation by ensuring that the sector is consolidated and thus merging smaller banks to create banks with stronger balance sheets and stronger capital base. This study contributes to the empirical research repository on the determinants of liquidity and more specifically, it identified the significant factors that affect South African commercial bank liquidity. Identifying the determinants of South African commercial bank liquidity will provide the South African Reserve Bank with insight into ways of enhancing liquidity management reforms, to improve the sector’s liquidity management practices and help to maintain a sound and liquid banking sector. / Business Management / M. Com. (Business Management)

Dans cette étude, nous essayons de combler le fossé entre deux courants de la littérature. Tout d'abord, nous menons une enquête approfondie sur les relations entre la liquidité et la baisse du marché dans un pays émergent (Brésil). Dans notre recherche, nous suivons la méthodologie utilisée par Hameed et al (2010) et Adrian et al (2011). Dans la première partie de l'étude, en utilisant la variable d'estimation de la mesure de liquidité proposée par Corwin et Schultz (2012), nous effectuons une analyse des séries temporelles pour estimer l'effet des rendements sur le marché des rentabilités individuelles, et l'impact de la crise sur la liquidité. Nous étendons en outre notre analyse à la liquidité des financements, mesurée par l'écart de la rémunération entre les "commercial papers" et le taux de base de la banque centrale, pour estimer l'effet de la baisse du marché lorsque les spéculateurs sont confrontés à une contrainte de financement. Dans la deuxième partie de notre recherche nous nous intéressons aux facteurs de la liquidité. Nous estimons l'effet de la liquidité du marché sur liquidité idiosyncrasique, et examinons si cet effet est amplifié dans le contexte de baisse importante des marchés. Dans la troisième partie de la thèse, nous répartissons les actions en trois portefeuilles equi-pondérés en fonction des pratiques de gouvernance d'entreprise différentielles. Nous effectuons l'analyse mentionnée ci-dessus pour estimer si la liquidité des entreprises ayant des pratiques de gouvernance d'entreprise différentes réagit différemment en présence de baisse importante des marchés et de spirales de liquidité. / In this study we try to bridge the gap between two strands of literature, first we conduct a thorough investigation about relation between, Market liquidity, funding liquidity and market declines in an emerging market i.e. Brazil. Then we conduct the analysis in the context of differential corporate governance practices and try to find if higher corporate governance practices have an effect on liquidity and how it affects stock liquidity in market declines. We closely follow the methodology used by Hameed et al (2010) and Adrian et al (2011). In the first part of the paper, using the High-Low spread estimator proposed by Corwin et Schultz (2012) as our liquidity proxy, we conduct a time series analysis to estimate the effect of individual returns market returns, and large market declines on liquidity. We further extend our analysis to include funding liquidity, measured by the spread between the commercial paper and the central bank rate, to estimate the effect of market declines when speculators face a funding constraint. In the second part of our analysis we move towards liquidity commonality. We estimate the effect of market wide liquidity movements on individual stock liquidity, and whether this effect is amplified in the context of large market downturns. In the third part of the paper we sort the stocks into three equally weighted portfolios based on differential corporate governance practices. We conduct the above mentioned liquidity analysis to estimate if liquidity of firms with differential corporate governance practices react differently in the times of large market downturns and liquidity spirals.

Cette thèse étudie le comportement des investisseurs des fonds mutuels ouverts et ses implications au risque de liquidité. Ces travaux de recherche ont pour objectif d’aider les gérants de fonds à éviter le scénario de "fund run" où ils perdent leurs clients de manière soudaine. La première étape de cette étude est de collecter une nouvelle base de données qui enregistre les "micro-transactions" des investisseurs. Cela nous permet d’analyser leurs comportements au niveau individuel et d’effectuer trois articles de recherche autours de ce sujet. Dans le premier article, nous développons un modèle de comptage auto-excitant qui capture des faits stylisés des séries des flux du fonds. De là, nous montrons un risque lié au passif du fonds qui est différent de celui lié à l’actif déjà documenté par la littérature précédente. Nous identifions également une contagion des chocs de liquidité entre les différents clients dans un même fonds. Dans le chapitre suivant, nous étudions les horizons d’investissement des clients individuels. Ces horizons sont fortement liés aux caractéristiques des investisseurs et aux conditions économiques. Nous montrons également que les gérants de fonds subissent un risque de sortie pré-maturée relatif au raccourcissement des horizons d’investissement de ses clients. Nous observons ensuite une hétérogénéité entre les investisseurs: ceux de long-terme comportent différemment que ceux de court-terme. Enfin, dans le dernier chapitre, nous nous intéressons aux activités de rééquilibre. Nous trouvons que de nombreux investisseurs détiennent un portefeuille contenant plusieurs fonds et le rééquilibrent afin de garder la même allocation d’actifs / This thesis studies the behaviour of investors in open-end mutual funds and its implications to the liquidity risk. We seek to help the fund managers to avoid the "fund run" scenarios where they loss their clients in a sudden way. We begin our research by collecting a unique data set which records the micro-transactions of fund investors. It allows us to monitor investors’ behaviour at the individual level and to accomplish three research articles around this topic. In the first article, we develop a self-exciting counting process to model the stylized facts of fund flows. Therefrom, we highlight a novel risk linked to the fund liability which is different than the asset-related risk documented by the previous literature. We also identify a liquidity contagion among different investors in a same fund. In the next chapter, we study the dispersion in the investing horizons of individual fund clients. These horizons are strongly determined by investors’ characteristics and economic conditions. We show that the fund managers suffer a pre-mature redemption risk, i.e. clients shorten their investing horizons and redeem pre-maturely. Especially, we observe a heterogeneity among investors: long-term ones bring a higher pre-mature redemption risk. In the last chapter, we are interested in the rebalance behaviour. We find that numerous investors hold a multi-funds portfolio and rebalance it to keep the target asset allocation.

Cette thèse s'inscrit dans le contexte d'après crises des subprimes et des dettes souveraines européennes. Il s'agit de périodes durant lesquelles les banques, en particulier dans la zone Euro et aux Etats-Unis, ont fait face à un assèchement de liquidité sans précédent ayant paralysé le système bancaire et conduit à la faillite de banques dont certaines solvables. La thèse cherche à répondre à la problématique suivante : Quelles sont les raisons du dysfonctionnement de deux canaux importants d'approvisionnement en liquidité par les banques, à savoir, le marché des actifs et surtout le marché monétaire interbancaire ? L'objectif est d'avoir un cadre d'analyse qui permet d'évaluer les propositions de la réglementation Bâle III en matière de contrôle du risque de liquidité dans les banques et d'éclairer les réflexions autour de la supervision bancaire. La première étude empirique est consacrée aux interactions entre le risque de liquidité de financement et le risque de liquidité de marché en situation de crise. Elle confirme bien la présence d'un renforcement mutuel entre ces deux types de risque dans les cas américain et européen durant la période allant de 2007 à 2011. La deuxième étude empirique se focalise sur le dysfonctionnement du marché monétaire interbancaire dans la zone Euro durant la même période en identifiant les motifs de la thésaurisation de liquidité par les banques, à savoir, le risque de contrepartie, le motif de précaution et le motif de spéculation. Les résultats montrent bien qu'il y a une relation significativement positive entre ces trois facteurs et la thésaurisation. Enfin, la troisième étude met l'accent sur les conséquences de la thésaurisation en termes de contagion interbancaire et de risque systémique. Les résultats confirment en effet l'impact de la thésaurisation sur le risque systémique dans la zone Euro. / During the U.S subprimes and the European sovereign debt crisis, banks faced with an unprecedent liquidity drying-up, leading to a banking system paralysis and failures of banks (including some solvable banks), in particular in United States and Euro zone. This dissertation seeks to answer the following question: what are the reasons of dysfunction of two important channels of liquidity supply of banks, namely, asset market and interbank money market? The aim is to have an analysis framework in order to evaluate banking regulations issued by Basel III and to enlighten reflections about banking supervision. The first empirical study examines the interactions between funding liquidity risk and market liquidity risk. Its results confirm that these two risk types are mutually reinforcing in American and European cases during the period between 2007 and 2011. The second empirical study focuses on the failure of the interbank market in Euro zone during the same period by identifying the motives behind the bank liquidity hoarding, namely, counterparty risk, precautionary motive and speculative motive. The results show that there is a significantly positive relation between these three factors and the liquidity hoarding. Finally, the third empirical study illustrates the repercussions of this phenomenon on systemic risk. The results confirm the impact of liquidity hoarding on systemic risk in Euro zone.

The correct measure and definition of liquidity in finance literature remains an unresolved empirical issue. The main objective of the present study was to develop, validate and test the liquidity mismatch index (LMI) developed by Brunnermeier, Krishnamurthy and Gorton (2012) empirically. Building on the work of these prior studies, the study undertook to develop a measure of liquidity that integrates both market liquidity and funding liquidity within a context of asset liability management. Liquidity mismatch indices were developed and then tested empirically to validate them by regressing them against the known determinants of liquidity. Furthermore, the study investigated the nexus between liquidity and profitability. The unit of analysis was a panel of 12 South African banks over the period 2005–2015. The study developed two liquidity measures – the bank liquidity mismatch index (BLMI) and the aggregate liquidity mismatch index (ALMI) – whose performances were compared to and contrasted with the Basel III liquidity measures and traditional liquidity measures using a generalised method of moments (GMM) model. Overall, the two constructed liquidity indices performed better than other liquidity measures. Significantly, the ALMI provided a better macro-prudential liquidity measure that can be utilised in dynamic stochastic general equilibrium (DSGE) models, thus presenting a major contribution to the body of knowledge. Unlike the LMI, the BLMI and ALMI can be used to evaluate the liquidity of a given bank under liquidity stress events, which are scaled by theoretically motivated and empirically supported liquidity weights. The constructed BLMI contains information regarding the liquidity risk within the context of asset liability mismatches, and the measure used comprehensive data from bank balance sheets and from financial market measures. The newly developed liquidity measures are based on portfolio management theory as they account for the significance of liquidity spirals. Empirical results show that banks increase their liquidity buffers during times of turmoil as both BLMI and ALMI improved during the period 2007–2009. Subsequently, the improvement in economic performance resulted in a rise in ALMI but a decrease in BLMI. We found no evidence to support the theory that banks, which heavily depend on external funding, end up in serious liquidity problems. The findings imply that any policy implemented with the intention of increasing bank capital is good for bank liquidity since the financial fragility–crowding-out hypothesis is outweighed by the risk absorption hypothesis because the relationship between capital and bank liquidity is positive. / Finance, Risk Management and Banking / D. Phil. (Management Studies)

This study examined the determinants of commercial bank liquidity in South Africa. The panel regression approach was used, applying panel data from twelve commercial banks over the period 2006 to 2016. A quantitative research method was used to investigate the relationship between bank liquidity and some microeconomic and bank-specific factors and between bank liquidity and selected macro-economic factors. The regression analysis for four liquidity ratios was conducted using the pooled ordinary least squares regression, fixed effects, random effects and the generalised methods of moments. However, the system generalised methods of moments approach was preferred over the other methods because it eliminated the problem of endogeneity. Results show that capital adequacy, size and gross domestic product have a positive and significant effect on liquidity. Loan growth and non-performing loans had a negative and significant effect on liquidity. Inflation had both a positive and a negative but an insignificant effect on liquidity. The study concluded that South African banks could enhance their liquidity positions by tightening their loan-underwriting criteria and credit policies. Banks should improve their credit risk management frameworks to be more prudent in their lending practices to improve the quality of the loan book to enhance liquidity. They also need to grow their capital levels by embarking on efficient revenue enhancements activities. Banks may also to look at their clients on an overall basis and not on transaction bases, and they need to improve non-interest revenue by introducing innovated products. The South African Reserve Bank could push for policies that might enhance capitalisation by ensuring that the sector is consolidated and thus merging smaller banks to create banks with stronger balance sheets and stronger capital base. This study contributes to the empirical research repository on the determinants of liquidity and more specifically, it identified the significant factors that affect South African commercial bank liquidity. Identifying the determinants of South African commercial bank liquidity will provide the South African Reserve Bank with insight into ways of enhancing liquidity management reforms, to improve the sector’s liquidity management practices and help to maintain a sound and liquid banking sector. / Business Management / M. Com. (Business Management)