Brunnermeier, Markus K. “
Deciphering the Liquidity and Credit Crunch 2007-2008”.
Journal of Economic Perspectives 23 (2009): ,
23, 77-100. Print.
AbstractThis paper summarizes and explains the main events of the liquidity and credit crunch in 2007-08. Starting with the trends leading up to the crisis, I explain how these events unfolded and how four different amplification mechanisms magnified losses in the mortgage market into large dislocations and turmoil in financial markets.
liquidity_credit_crunch.pdf
liquidity_crunch_2007_08_slides.pdf
liquidity_credit_crunch_nber.pdf Brunnermeier, Markus K, and Lasse Heje Pedersen. “
Market Liquidity and Funding Liquidity”.
Review of Financial Studies 22 (2009): ,
22, 2201-2238. Print.
AbstractWe provide a model that links an asset's market liquidity (i.e., the ease with which it is traded) and traders' funding liquidity (i.e., the ease with which they can obtain funding). Traders provide market liquidity, and their ability to do so depends on their availability of funding. Conversely, traders' funding, i.e., their capital and margin requirements, depends on the assets' market liquidity. We show that, under certain conditions, margins are destabilizing and market liquidity and funding liquidity are mutually reinforcing, leading to liquidity spirals. The model explains the empirically documented features that market liquidity (i) can suddenly dry up, (ii) has commonality across securities, (iii) is related to volatility, (iv) is subject to “flight to quality,” and (v) co-moves with the market. The model provides new testable predictions, including that speculators' capital is a driver of market liquidity and risk premiums.
liquidity_slides.pdf
liquidity.pdfMarket liquidity and the funding of traders are mutually reinforcing, giving rise to "liquidity phenomena" like fragility, commonality and flight to quality.
Brunnermeier, Markus K, and Motohiro Yogo. “
A Note on Liquidity Risk Management”.
American Economic Review 99 (2009): ,
99, 578-83. Print.
AbstractWhen a firm is unable to roll over its debt, it may have to seek more expensive sources of financing or even liquidate its assets. This paper provides a normative analysis of minimizing such rollover risk, through the optimal dynamic choice of the maturity structure of debt. The objective of a firm with long-term assets is to maximize the effective maturity of its liabilities across several refinancing cycles, rather than to maximize the maturity of the current bonds outstanding. An advantage of short-term financing is that a firm, while in good financial health, can readjust its maturity structure more quickly in response to changes in its asset value.
liquidity_risk_management.pdfDuration hedging might give the wrong prescription for minimizing rollover risk.