<p>Fisher Black and Myron Scholes (Black and Scholes, 1973) presented in 1973 a valuation model for options that was intuitive and user friendly. This revolutionized the option market and made pricing an option easy.</p><p> </p><p>To get a sound understanding of liquidity risk we have to specify and describe liquidity (Matz and Neu, 2007, p.5). Market liquidity and funding liquidity are two kinds of liquidity. Market liquidity can be described as good when a security is easy to trade. Easy to trade is defined as small bid ask spread, small price impact and high resilience. If a bank or investor have good funding liquidity they have good availability of funds by their own capital or from loans.</p><p> </p><p>The meaning of liquidity risk can be divided into two major risks; market liquidity risk and funding liquidity risk (Pedersen, 2008). Market liquidity risk is the risk that the market liquidity gets worse when a trade needs to be made and this is the risk focused on in this paper.</p><p> </p><p>Do liquidity costs in option pricing theory exist and does it depend on a real supply curve?</p><p> </p><p>The main objective in this paper is to show if liquidity risk has a significant impact on option price and depends on a real supply curve. The study is based on theory and conclusions from earlier research. Built from Jarrow and Protters work in liquidity risk in option price (Jarrow and Protter, 2007) a model for the supply curve is derived.</p><p> </p><p>The scientific ideal in this paper has a clear positivistic approach. The quantitative method is my choice not only because of the link between positivism, deduction and quantitative methods but gives a certain advantage when considering this problem formulation and the type of data accessible. A model is derived with a base from a model derived by Jarrow and Protter (2007) and used to show the impact of liquidity risk in the option pricing theory.</p><p> </p><p>The result presented in this paper has shown that liquidity costs exist in theory and in practice, and this cost are binding. This model can be used to get exact costs in a specific case with a specific option and can help brokers to know the real liquidity risk they are exposed to.</p>

Fisher Black and Myron Scholes (Black and Scholes, 1973) presented in 1973 a valuation model for options that was intuitive and user friendly. This revolutionized the option market and made pricing an option easy.   To get a sound understanding of liquidity risk we have to specify and describe liquidity (Matz and Neu, 2007, p.5). Market liquidity and funding liquidity are two kinds of liquidity. Market liquidity can be described as good when a security is easy to trade. Easy to trade is defined as small bid ask spread, small price impact and high resilience. If a bank or investor have good funding liquidity they have good availability of funds by their own capital or from loans.   The meaning of liquidity risk can be divided into two major risks; market liquidity risk and funding liquidity risk (Pedersen, 2008). Market liquidity risk is the risk that the market liquidity gets worse when a trade needs to be made and this is the risk focused on in this paper.   Do liquidity costs in option pricing theory exist and does it depend on a real supply curve?   The main objective in this paper is to show if liquidity risk has a significant impact on option price and depends on a real supply curve. The study is based on theory and conclusions from earlier research. Built from Jarrow and Protters work in liquidity risk in option price (Jarrow and Protter, 2007) a model for the supply curve is derived.   The scientific ideal in this paper has a clear positivistic approach. The quantitative method is my choice not only because of the link between positivism, deduction and quantitative methods but gives a certain advantage when considering this problem formulation and the type of data accessible. A model is derived with a base from a model derived by Jarrow and Protter (2007) and used to show the impact of liquidity risk in the option pricing theory.   The result presented in this paper has shown that liquidity costs exist in theory and in practice, and this cost are binding. This model can be used to get exact costs in a specific case with a specific option and can help brokers to know the real liquidity risk they are exposed to.

South Africa will be implementing Basel II on 1 January 2008. Basel II provides regulatory capital requirements for credit risk, market risk and operational risk. The purpose of capital requirements is to level the playing field for all internationally active banks and to protect consumers against these risks. Although there is an obvious threat of liquidity risk and it is important to correctly measure and manage liquidity risk, it is almost glaringly omitted from Basel II. The result of not managing liquidity risk properly may have dire consequences for banks because a liquidity crisis may happen without warning. Therefore, the aim of this study was to explore current practices and to propose guidelines for effective liquidity risk regulation in South Africa. A literature study and quantitative analysis on liquidity risk in South Africa were conducted to assess whether it is valid for regulators to require banks to hold capital for liquidity risk. This study provides conclusions and recommendations on the regulatory treatment of liquidity risk in South Africa under Basel II. Although Pillar 2 reviews a variety of other risks and not only liquidity risk, it is proposed that the liquidity risk part of such reviews is conducted on the basis of a questionnaire used to determine possible gaps between banks' practices and prescribed criteria regarding the management and measurement of liquidity risk. It is important to note that such an approach has a constraint in terms of the substantial amount of work that would have to be done on the regulation of liquidity risk by both regulators and banks. Therefore resource constraints and the cost versus the benefit of such an approach would have to be considered carefully. The all-encompassing conclusion to this study is that capital would not be an effective mitigant for liquidity risk for a number of reasons. Liquidity risk differs from bank to bank and a general capital charge for all banks may not be sensible, therefore liquidity risk should be analysed on a bank-by-bank basis. In other words, capital could be charged for liquidity risk under Pillar 2(b) of Basel II. Such a capital charge would not serve the purpose of covering losses resulting from liquidity risk, but would instead impose a penalty on banks that are deemed to manage and measure liquidity risk imprudently. Such a penalty would typically be quite small but would serve as an incentive for banks to improve their management and measurement techniques to the desired level as set out by prescribed criteria. The criteria that should be used for determining whether banks measure and manage liquidity risk prudently should be of such a nature that the Bank Supervision Department (BSD) of the South African Reserve Bank (SARB) complies with Basel Core Principle 14: Liquidity Risk in regulating liquidity risk. In addition, it should align the criteria used to the 14 Principles for the sound management of liquidity as prescribed by the Bank for International Settlements and the Institute of International Finance. Furthermore, it is proposed that the BSD should not prescribe to banks which methods to use to report their liquidity risk, because all banks are not the same in terms of size and sophistication. For this reason, banks should be allowed to follow an internal models approach for liquidity risk whereby banks are, subject to regulatory approval, allowed to use their own internal liquidity risk measures to report liquidity risk to the BSD. This approach is similar to the approach followed by the Bundesbank in Germany. A liquidity risk questionnaire could be drafted according to which banks' liquidity risk management and measurement is assessed in terms of the sound Principles for managing liquidity risk and the Basel Core Principles. One questionnaire could be used for the purposes of assessing the quality of banks' liquidity risk management and measurement in terms of a Supervisory Review and Evaluation Process (SREP) as well as for banks applying for approval of an internal models approach for liquidity risk. The same questionnaire could be used for both purposes, or the questionnaire could be divided into two clear sections whereby all banks are required to answer the SREP (or Pillar 2(b)) section, and only banks applying for the use of an internal models approach for liquidity risk are required to complete this section. A further conclusion to this study is that the BSD should publish a framework in which its approach to regulating liquidity risk is described in detail. Some aspects that should be included in such a document include a widely-accepted definition for liquidity risk and guidelines/minimum standards for measurement and management techniques for liquidity risk and the process that will be followed under Pillar 2 of Basel II. If the BSD is concerned about the level of potential liquidity risk in the South African banking system, it should consider having the additional instruments that are eligible as collateral included as instruments eligible for liquid asset reserve requirements. An additional mitigant for liquidity risk may be that the BSD requires banks to report their liquidity risk more frequently than the current monthly basis. / Thesis (M.Com. (Risk Management))--North-West University, Potchefstroom Campus, 2008.

South Africa will be implementing Basel II on 1 January 2008. Basel II provides regulatory capital requirements for credit risk, market risk and operational risk. The purpose of capital requirements is to level the playing field for all internationally active banks and to protect consumers against these risks. Although there is an obvious threat of liquidity risk and it is important to correctly measure and manage liquidity risk, it is almost glaringly omitted from Basel II. The result of not managing liquidity risk properly may have dire consequences for banks because a liquidity crisis may happen without warning. Therefore, the aim of this study was to explore current practices and to propose guidelines for effective liquidity risk regulation in South Africa. A literature study and quantitative analysis on liquidity risk in South Africa were conducted to assess whether it is valid for regulators to require banks to hold capital for liquidity risk. This study provides conclusions and recommendations on the regulatory treatment of liquidity risk in South Africa under Basel II. Although Pillar 2 reviews a variety of other risks and not only liquidity risk, it is proposed that the liquidity risk part of such reviews is conducted on the basis of a questionnaire used to determine possible gaps between banks' practices and prescribed criteria regarding the management and measurement of liquidity risk. It is important to note that such an approach has a constraint in terms of the substantial amount of work that would have to be done on the regulation of liquidity risk by both regulators and banks. Therefore resource constraints and the cost versus the benefit of such an approach would have to be considered carefully. The all-encompassing conclusion to this study is that capital would not be an effective mitigant for liquidity risk for a number of reasons. Liquidity risk differs from bank to bank and a general capital charge for all banks may not be sensible, therefore liquidity risk should be analysed on a bank-by-bank basis. In other words, capital could be charged for liquidity risk under Pillar 2(b) of Basel II. Such a capital charge would not serve the purpose of covering losses resulting from liquidity risk, but would instead impose a penalty on banks that are deemed to manage and measure liquidity risk imprudently. Such a penalty would typically be quite small but would serve as an incentive for banks to improve their management and measurement techniques to the desired level as set out by prescribed criteria. The criteria that should be used for determining whether banks measure and manage liquidity risk prudently should be of such a nature that the Bank Supervision Department (BSD) of the South African Reserve Bank (SARB) complies with Basel Core Principle 14: Liquidity Risk in regulating liquidity risk. In addition, it should align the criteria used to the 14 Principles for the sound management of liquidity as prescribed by the Bank for International Settlements and the Institute of International Finance. Furthermore, it is proposed that the BSD should not prescribe to banks which methods to use to report their liquidity risk, because all banks are not the same in terms of size and sophistication. For this reason, banks should be allowed to follow an internal models approach for liquidity risk whereby banks are, subject to regulatory approval, allowed to use their own internal liquidity risk measures to report liquidity risk to the BSD. This approach is similar to the approach followed by the Bundesbank in Germany. A liquidity risk questionnaire could be drafted according to which banks' liquidity risk management and measurement is assessed in terms of the sound Principles for managing liquidity risk and the Basel Core Principles. One questionnaire could be used for the purposes of assessing the quality of banks' liquidity risk management and measurement in terms of a Supervisory Review and Evaluation Process (SREP) as well as for banks applying for approval of an internal models approach for liquidity risk. The same questionnaire could be used for both purposes, or the questionnaire could be divided into two clear sections whereby all banks are required to answer the SREP (or Pillar 2(b)) section, and only banks applying for the use of an internal models approach for liquidity risk are required to complete this section. A further conclusion to this study is that the BSD should publish a framework in which its approach to regulating liquidity risk is described in detail. Some aspects that should be included in such a document include a widely-accepted definition for liquidity risk and guidelines/minimum standards for measurement and management techniques for liquidity risk and the process that will be followed under Pillar 2 of Basel II. If the BSD is concerned about the level of potential liquidity risk in the South African banking system, it should consider having the additional instruments that are eligible as collateral included as instruments eligible for liquid asset reserve requirements. An additional mitigant for liquidity risk may be that the BSD requires banks to report their liquidity risk more frequently than the current monthly basis. / Thesis (M.Com. (Risk Management))--North-West University, Potchefstroom Campus, 2008.

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The value add of gender diversity in the financial services industry has been overlooked. From providing capital for businesses to financing mortgages, it goes without question that financial institutions play a most critical role in the function of the economy. Our study poses a potential solution for managing the immense responsibility of these entities. The financial crisis of 2008 awakened the public to the high levels of risk that banks endure in the practice of their business. Banks often rely on a liquidity cushion in order to mitigate the risk of financial distress. Liquidity consists of the cash and other liquid assets that banks retain for times of unexpected demands for cash. Financial institutions often vary in their levels of liquidity due to different risk tolerances and appetites for return. This thesis contributes to existing literature by looking into the role that gender diverse boards play in managing liquidity risk and its transparent effect on bank performance. Through an analysis of seventy-four global, regional, small, mid and large cap commercial banks, we concluded that increased gender diversity results in increased liquidity and decreased risk to bank assets. In the process, we also test the effect of increased liquidity on bank performance, as it would likely be a concern for shareholders

Yes / We develop bespoke rational bubble models for Bitcoin and cryptocurrencies that incorporate both heavy tails and the probability of a complete collapse in asset prices. Empirically, we present robustified evidence of bubbles in Bitcoin and Ethereum. Theoretically, we show that liquidity risks may generate heavy-tails in Bitcoin and cryptocurrency markets. Even in the absence of bubbles dramatic booms and busts can occur. We thus sound a timely note of caution.

In order to address the deficiencies in the banking regulation revealed by the recent financial crisis the Basel III introduces two minimum standards for funding liquidity, Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). The goal of this thesis is to analyze whether the NSFR is defined optimally or whether the Basel Committee on Banking Supervision (BCBS) will be forced to relax NSFR conditions similarly as happened by the LCR. Based on the approximation of the NSFR between 2007 and 2012 for a sample of 3 128 European banks we test the ability of banks to satisfy the NSFR. Our results suggest that the European banks have not started to converge to the NSFR yet. Despite this fact they should not have problems with meeting this requirement as 40.3% of banks in our sample would have already satisfied the NSFR in 2011. A Probit model analysis suggests that the NSFR requirement will decrease the probability of bank defaults and therefore increase the stability of the banking sector in the future which proves that the NSFR is correctly specified. Moreover, a simple stress testing shows that the stability of the system would not be improved anymore if the NSFR was defined more strictly. The current version of the NSFR therefore seems to be optimal and in our opinion should be...

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.

The financial crises and bank runs in the past decade increased attention to the financial systems. In Turkey as in Europe banks are main financial intermediaries and financial crises occur mostly due to realization of risks in banks. Although liquidity risk is embedded into daily operations of banks unless controlled it may take banks into insolvency and even bankruptcy. This thesis aims to examine liquidity risk structure of Turkish banking sector. As a sample the domestic commercial banks in Turkey is chosen. The risk profile of the sector is examined by using a ratio analysis. The accounting figures in balance sheets and income statements of banks are employed for statistical analysis about liquidity risk of the sector. The means of liquidity ratios among different groups of banks are compared via analysis of variance. Moreover relation between liquidity risk and return in the sector is analysed by using panel data regressions.