In conjunction with the recent interest in the liquidity preferences of commercial banks, which is itself part of a new supply theory of money, this thesis investigates the reserve behaviour of Canadian commercial banks from 1920-1939. Several models of bank reserve behaviour are presented including the one to be tested in this thesis. This model differs from the others in that it will be tested with monthly data on individual banks (and hence can explain differences among banks as to the holding of reserves) whereas the others were tested with annual data for a group of banks or a banking system. Since there was no required reserve in Canada prior to March, 1935, there was also no definition of what constituted reserves. This problem had to be investigated before any reserve ratios could be calculated. After calculating some reserve ratios, several interesting observations can be made. The hypothesis that Canadian, commercial banks adhered to a ten per cent required reserve ratio through a gentlemen's agreement within the Canadian Bankers Association was clearly refuted. Also the effect of the establishment of the .Bank of Canada on reserve holdings was noticed. Furthermore, the evidence cast some doubt on the conclusions of George Morrison in his book, Liquidity Preferences of Commercial Banks. The model presented previously was then tested both with monthly data for individual banks and with monthly data for the banking system as a whole. The tests using monthly data for the individual banks indicated the need for further refinement of the model although considering the number of observations and the diversity among banks perhaps the R² was not that bad.. The R² was much improved when monthly data for the banking system was used. This is to be expected as aggregations over banks hides much detail which, thus, does not have to be explained. / Arts, Faculty of / Vancouver School of Economics / Graduate

The relationship between liquidity and return predictability may be an im- portant aspect to consider when investing in cryptoassets. We examine this relation using both cross-sectional as well as panel data. First, we calculate a set of predictability measures and aggregate the results into four variables. We then regress the predictability variables on a set of controls and two measures of liquidity, specifically the Amihud illiquidity ratio and the Corwin-Schultz spread estimate. The other independent variables include the logarithm of volume, turnover ratio and Garman-Klass volatility. Results from the cross- sectional analysis indicate that liquidity negatively impacts the degree of return predictability. Moreover, findings from a subset of panel data, including only 50 cryptoassets with the largest market capitalization, provide some evidence in favor of this relationship. Results from full panel data, however, present contradictory evidence. For these regressions, liquidity is found to be either in- significant or to possess a positive impact on the degree of return predictability. Altogether, we obtain mixed evidence about the effect of cryptoasset liquidity on return predictability. JEL Classification C53, C58, G14 Keywords Cryptoassets, Predictability, Liquidity, Panel data Title...

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.

Investors have historically demanded a return premium for taking on the risk of illiquidity both in terms of characteristic and systematic liquidity risk. Recent research have presented results suggesting that the liquidity premium is diminishing. The increasing popularity of passive investments such as Exchange Traded Funds (ETFs) have been proposed as a driving force for the declining trend. Despite the popularity of ETFs, there is limited research how they impact the financial markets. The purpose of this thesis is to investigate how the liquidity premium has developed in the United States between 1997 and 2016 and to explore if developments in the liquidity premium can be linked to the capital inflow to the United States ETF market. The thesis uses measures of stocks’ spreads and order book depths as proxies for the characteristic and systematic liquidities. The proxies are used to test if liquidity has influenced stock returns over 1-year, 5-years and the entire 20-year period. The empirical results obtained through Fama-MacBeth regressions show that the liquidity premium can fluctuate by both sign and magnitude year by year. The characteristic risk premium is negative and significant for the entire 20-year period and the 1-year regressions suggests a clear negative trend. The systematic liquidity premium on the other hand is positive and significant for the entire 20-year period but the 1-year regressions do not show a clear trend. The empirical results show no statistical significance that ETFs influence the liquidity premium. However, the graphical interpretation of the 1-year regressions suggests that the characteristic liquidity premium is negatively correlated with the growth of ETFs. The negative characteristic premium implies that investors are not being adequately compensated for the risk of illiquidity and should therefore avoid a liquidity-based investing strategy which has generated excess return in the past.

This thesis consists of three empirical essays in financial economics, with particular focus on the European Union and the Eurozone. The thesis investigates topics related to market liquidity and integration. In particular, it covers the transmission of liquidity shocks across Eurozone markets, the role of market liquidity in the repurchase programme and integration of Eurozone economies in terms of welfare gains from trade. Liquidity and integration have received considerable attention in recent years, particularly within the context of global financial and macroeconomic uncertainty over the last decade. In the first empirical essay, we investigate static and dynamic liquidity spillovers across the Eurozone stock markets. Using a generalised vector autoregressive (VAR) model, we introduce a new measure of liquidity spillovers. We find strong evidence of interconnection across countries. We also test the existence of liquidity contagion using a dynamic version of our static spillover index. Our results indicate that the transmission of shocks increases during periods of higher financial turbulence. Moreover, we find that core economies tend to be dominant transmitters of shocks, rather than absorber. The second essay investigates the role played by market liquidity in the execution of open-market share repurchases in the UK which is the most active market within the EU for this payout method. Using a unique hand collected data set from Bloomberg Professionals, we find that the execution of share repurchases does not depend on the long-term underlying motive, but it rather relies on market liquidity and other macroeconomic variables. We also provide a methodological contribution using censored quantile regression (CQR), which overcomes most of the econometric limitations of the Tobit models, widely employed previously within this literature. The third essay quantifies the welfare gains from trade for the Eurozone countries. We apply a trade model that allows us to estimate the increase in real consumption as a result of trade between countries. We estimate welfare gains using two sufficient aggregate statistics. These are the share of expenditure on domestic goods and the elasticity of exports with respect to trade cost. We offer a methodological contribution for the estimation of elasticities by applying the Poisson pseudo-maximum likelihood (PPML) using a gravity model. PPML allows the estimation of gravity models in their exponential form, allowing the inclusion of zero trade flows and controlling for heteroskedasticity. Previous studies present several econometric limitations as a result of estimating gravity models in their log-linearised form. Our results indicate that joining the euro did not significantly increase trade gains for member countries. Nevertheless, differences across countries are significant and Northern economies experience a higher increase in welfare gains trade as compared to Southern economies.

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)

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.

PhD (Financial Management) / Department of Mathematics and Applied Mathematics / See the attached abstract below

Master of Arts / Department of Economics / Lloyd B. Thomas Jr / Can stimulative monetary policy be effective when there is a “liquidity trap”? This question surfaced during the Great Depression and is raising its head again today due to the current financial crisis. A definitive answer never materialized for the 1930’s, as differences of opinion between non-monetarist and monetarist economists arose about this issue. This need not be the case today. In this thesis I will first enumerate several different meanings of the term “liquidity trap” and their implications for monetary policy. Then, with data from the Federal Reserve, I will attempt to validate the likelihood of a liquidity trap. I do this for the demand for money and bank liquidity traps. I use regression analysis over a fifteen year period with varying interest rates to determine if the elasticities of demand increase as interest rates fall, indicating a liquidity trap. My use of log linear regressions for both demand for money and bank liquidity traps, using data from the present financial crisis, adds to the evidence supporting the liquidity hypothesis, but does not empirically establish the existence of a liquidity trap. Following my findings, I detail actions taken by the Federal Reserve and show the subsequent results through the summer and into the fall of 2009. From this, I make a conclusion that the United States is most likely in a liquidity trap and it does matter.