FRIC/Finance Seminar with Jennie Bai, Georgetown University
FRIC Center for Financial Frictions and the Department of Finance are proud to announce the upcoming seminar with Jennie Bai, Georgetown University.
Title: Measuring Liquidity Mismatch in the Banking Sector
This paper implements a liquidity measure proposed by Brunnermeier, Gorton and Krishnamurthy (2011), "the Liquidity Mismatch Index (LMI)," to measure the mismatch between the market liquidity of assets and the funding liquidity of liabilities. We view each asset and each liability as a derivative on the price of the underlying perfectly liquid asset. Using bank regulatory report and repo transaction data, we construct this LMI for 1507 bank holding companies during 2002 - 2013 and test their time-series and cross-sectional patterns. In aggregate, our LMI provides an anchoring point to measure liquidity shortfalls in the U.S. banking sector. In the cross section, we find that i) banks with most significant liquidity mismatch are too-big-to-fail ones; ii) banks holding more liquidity on balance sheet have lower market performance in normal time, but are greatly rewarded in the stressed time.