An empirical analysis of cost-based market liquidity measures for U.S & Norwegian banks
Year: 2014
Type: dissertation
Abstract: The financial crisis of 2007-2009 highlights the role banks play in our economy, and how interconnected banks in reality are.This increases the risk that a liquidity squeeze develops into a solvency problem.Based on the theoretical foundation on market liquidity, and why it is a priced risk factor for assets, and in particular for stocks, I apply a particular measure of market liquidity, namely the bid-ask spread, on US banks' stocks and Norwegian banks' stocks, as well on their market, S&P500 Index and OSEBX, respectively.The two estimators for the bid-ask spread applied in this thesis, was derived by Roll (1984) and in a recent paper by Corwin and Schultz (2012).I find that (a) liquidity has substantial time-variation, both for banks' stocks and for markets overall within both countries investigated; (b) a systemic liquidity breakdown appears in the recent financial crisis which led traders to suffer losses, as the costs, bid-ask spreads, for trading banks' stocks, S&P500 Index and OSEBX increases; (c) liquidity has commonality for the individual stocks and markets within the country; (d) the volatility of liquidity increases significantly after the Lehman Brother's insolvency, both for the market as a whole and for banks' stocks, thus the liquidity premium demanded by investors on trading banks' stocks, S&P500 Index and OSEBX increases; and, finally, (e) the tendency of Norwegian banks' stocks liquidity and OSEBX liquidity to respond to swings in the US banks' stocks liquidity and S&P500 Index liquidity, respectively, increases after the Lehman Brother's bankruptcy.The analysis has potential implications for central banks, traders, performance evaluation, risk managers, and academic research.
Source: BIBSYS Brage (BIBSYS (Norway))
Author: Jawad Saleemi
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2504127728