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We argue that a firm's aggregate risk is a key determinant of whether it manages its future liquidity needs through cash reserves or bank lines of credit. Banks create liquidity for firms by pooling their idiosyncratic risks. As a result, firms with high aggregate risk find it costly to get...
Persistent link: https://www.econbiz.de/10012462534
The average cash to assets ratio for U.S. industrial firms increases by 129% from 1980 to 2004. Because of this increase in the average cash ratio, American firms at the end of the sample period can pay back their debt obligations with their cash holdings, so that the average firm has no...
Persistent link: https://www.econbiz.de/10012466129
Liquidity risk in banking has been attributed to transactions deposits and their potential to spark runs or panics. We show instead that transactions deposits help banks hedge liquidity risk from unused loan commitments. Bank stock-return volatility increases with unused commitments, but the...
Persistent link: https://www.econbiz.de/10012466434
This paper argues that banks have a unique ability to hedge against market-wide liquidity shocks. Deposit inflows provide funding for loan demand shocks that follow declines in market liquidity. Consequently, one dimension of bank specialness' is that banks can insure firms against systematic...
Persistent link: https://www.econbiz.de/10012468741
moneyness of the option as a function of the asset's distribution, the risk-free rate, and the VaR hedging period. We find that … the optimal strike of the put is independent of the level of expense the institution is willing to incur for its hedging … hedging cost or the increased cost to achieve a given VaR, are economically significant. Comparative static results show that …
Persistent link: https://www.econbiz.de/10012472656
We study the interplay between corporate liquidity and asset reallocation opportunities. Our model shows that financially distressed firms are acquired by liquid firms in their industries even when there are no operational synergies associated with the merger. We call these transactions...
Persistent link: https://www.econbiz.de/10012461933
We examine the determinants and implications of holdings of cash and marketable" securities by publicly traded U.S. firms in the 1971-1994 period. Firms with strong growth" opportunities and riskier cash flows hold relatively high ratios of cash to total assets. Firms" that have the greatest...
Persistent link: https://www.econbiz.de/10012472578
We study a modification of the Diamond and Dybvig (1983) model in which the bank may hold a liquid asset, some depositors see sunspots that could lead them to run, and all depositors have incomplete information about the bank's ability to survive a run. The incomplete information means that the...
Persistent link: https://www.econbiz.de/10012456621
We present a model that characterizes the relationship between optimal dynamic cash management and the choice of the means of payment. The novel feature of the model is the sequential nature of the payments choice: in each instant the agent can choose to pay with either cash or credit. This...
Persistent link: https://www.econbiz.de/10012457556
We develop a new tractable model of banks' liquidity management and the credit channel of monetary policy. Banks finance loans by issuing demand deposits. Because loans are illiquid, deposit transfers across banks must be settled with reserves. Deposit withdrawals are random, and banks manage...
Persistent link: https://www.econbiz.de/10012458178