Download A Quantitative Liquidity Model for Banks by Christian Schmaltz PDF
By Christian Schmaltz
Internal liquidity versions for banks have received enormous significance seeing that German regulators have determined to simply accept them for regulatory reporting. Christian Schmaltz identifies product money flows, investment unfold, investment means, haircuts, and temporary rates of interest as key liquidity variables. Then, he assumes particular stochastic techniques for the foremost variables resulting in a specific liquidity version. The modelling concentration lies at the product money circulate that's defined via a jump-diffusion strategy. ultimately, the writer applies the version to the allocation, inner pricing, and optimization of liquidity.
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Extra info for A Quantitative Liquidity Model for Banks
6 Shiftability decouples maturity and asset liquidity because assets can be liquidated before maturity. 7 In the following, we use ’liquidation’ for shiftability, as ’liquidation’ is commonly used for selling/pledging assets. If we mean self-liquidation, we explicitly use the term ’selfliquidation’. In pricing models, market illiquidity is measured by an illiquidity premium. 8 We discuss both methods to outline the differences. 9 It can be interpreted as a premium that investors require to be compensated for transaction cost or valuation uncertainty.
Repoing has a slight disadvantage in the form of haircut. The P&L-advantage of repoing is twofold: ﬁrstly, the funding spread is lower than for unsecured funding. Secondly, repoing avoids liquidation losses in times of market turmoils. In our setup, we subsume repoing under asset liquidation. We do so as the distinction of repoing and asset sale would make the analysis more complex without providing much insight. This is valid for moderate haircuts and low short-term spreads. 19 To study optimal liquidity management, we consider it more appropriate to describe the liquidity strategies that banks run and to identify risk and return of each strategy.
Fig. 1a Balance Sheet Fig. 1b Cash Flow as Stock Delta 26 3 Liquidity Framework Assets generate incoming, liabilities generate outgoing cash ﬂows. The aggregate cash ﬂow of a bank is the netted delta of positions. It is positive (incoming cash ﬂow) if the balance increases and negative (outgoing cash ﬂow) if it decreases. Furthermore, the aggregate cash ﬂow is zero if the balance amount does not change. Just as cash ﬂows can be derived from positions, positions can be derived from cash ﬂows: the current positions are the sum of all future cash ﬂows.