ILLIQUIDITY COMPONENT OF CREDIT RISK

Stephen Morris, Hyun Song Shin

Research output: Contribution to journalArticle

14 Scopus citations

Abstract

We provide a theoretical decomposition of bank credit risk into insolvency risk and illiquidity risk, defining illiquidity risk to be the counterfactual probability of failure due to a run when the bank would have survived in the absence of a run. We show that illiquidity risk is (i) decreasing in the “liquidity ratio”—the ratio of realizable cash on the balance sheet to short-term liabilities; (ii) decreasing in the excess return of debt; and (iii) increasing in the solvency uncertainty—a measure of the variance of the asset portfolio.

Original languageEnglish (US)
Pages (from-to)1135-1148
Number of pages14
JournalInternational Economic Review
Volume57
Issue number4
DOIs
StatePublished - Nov 1 2016

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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