RT Journal Article
SR Electronic
T1 Valuing Financial Assets with Liquidity Discount:
An Implication for Basel III
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP 45
OP 63
DO 10.3905/jfi.2012.22.3.045
VO 22
IS 3
A1 Ren-Raw Chen
A1 William Filonuk
A1 Dilip K. Patro
A1 An Yan
YR 2012
UL https://pm-research.com/content/22/3/45.abstract
AB The unprecedented financial crisis in 2007 and 2008 and the largest bankruptcy in U.S. history prompted expedited regulation in the financial industry. A new Basel Accord has been proposed to further regulate the main risk that caused the crisis: liquidity risk. In a recent article, Chen [2012] presents a liquidity discount model in which financial securities can be evaluated with substantial discounts at the presence of a liquidity squeeze in the marketplace. In this article, we adopt this model to evaluate a selection of the 23 largest U.S. financial institutions (assets over $100 billion) to investigate the liquidity impact during the crisis period. We calibrate the model to market information such as market capitalization and volatility. We find that the model can provide significant predictive power of a bank’s liquidity health.TOPICS: Financial crises and financial market history, big data/machine learning, information providers/credit ratings