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Asian Review of Financial Research, Vol., No..
pp.1668~1711
pp.1668~1711
How a Security Market Collapses? : Evidence in Japanese Floaters Market
Dong-Hyun Ahn Professor of Finance, Department of Economics, Seoul National University
In-Seok Baek Research fellow, Korea Capital Market Institute
Ji-Yeong Chung Post-doctoral researcher (BK21 plus), Department of Economics, Seoul National University
Kyu Ho Kang Professor of Economics, Department of Economics, Korea University
A generally accepted belief about the liquidity risk, among many others, is that its gravity which at other times would remain dormant would suddenly dash into prominence during a crisis. Contrary to such a belief, existing empirical literature fails to show such a behavior. In this paper, we explore the time-series properties of the liquidity risk and its amplication amid the crisis by investigating a unique nancial instrument, the Japanese oating-rate note, which can be priced almost by no-arbitrage pricing restrictions alone, thereby providing clean measure of liq- uidity risk. By using the Bayesian MCMC technique, we estimate the `liquidity discount rate' (LDR hereafter) latent in the notes along with the structural pa- rameters of a liquidity term structure model which introduces a Markovian regime shifts into the discrete Vasicek model. The time-series behavior of the estimated LDR demonstrates the dramatic vicissitude in market liquidity conditions in ac- cordance with the conventional belief. In addition, we empirically analyze the relationship between the market liquidity and funding liquidity as suggested by Brunnermeier and Pedersen (2009) who theoretically explain the sudden liquidity dry-up during the crisis. We nd that in normal times, the market liquidity risk is relatively dormant and it has no systematic relation with the funding liquidity risk. During the crisis, however, the global funding liquidity is shown to drive market liquidity into deterioration. Additionally, as the market for Japanese oating-rate notes did not restore its pre-crisis status, we discuss the plausibility and possibility of the market collapse following the liquidity crisis.
Dong-Hyun Ahn
In-Seok Baek
Ji-Yeong Chung
Kyu Ho Kang
A generally accepted belief about the liquidity risk, among many others, is that its gravity which at other times would remain dormant would suddenly dash into prominence during a crisis. Contrary to such a belief, existing empirical literature fails to show such a behavior. In this paper, we explore the time-series properties of the liquidity risk and its amplication amid the crisis by investigating a unique nancial instrument, the Japanese oating-rate note, which can be priced almost by no-arbitrage pricing restrictions alone, thereby providing clean measure of liq- uidity risk. By using the Bayesian MCMC technique, we estimate the `liquidity discount rate' (LDR hereafter) latent in the notes along with the structural pa- rameters of a liquidity term structure model which introduces a Markovian regime shifts into the discrete Vasicek model. The time-series behavior of the estimated LDR demonstrates the dramatic vicissitude in market liquidity conditions in ac- cordance with the conventional belief. In addition, we empirically analyze the relationship between the market liquidity and funding liquidity as suggested by Brunnermeier and Pedersen (2009) who theoretically explain the sudden liquidity dry-up during the crisis. We nd that in normal times, the market liquidity risk is relatively dormant and it has no systematic relation with the funding liquidity risk. During the crisis, however, the global funding liquidity is shown to drive market liquidity into deterioration. Additionally, as the market for Japanese oating-rate notes did not restore its pre-crisis status, we discuss the plausibility and possibility of the market collapse following the liquidity crisis.
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