arXiv · arXiv · 2012
We propose a unified structural credit risk model incorporating both insolvency and illiquidity risks, in order to investigate how a firm's default probability depends on the liquidity risk associated with its financing structure. We assume the firm finances its risky assets by mainly issuing short- and long-term debt. Short-term debt can have either a discrete or a more realistic staggered tenor structure. At rollov…
Gechun Liang, Eva Lütkebohmert, Wei Wei
OpenAlex · Review of Financial Studies · 2008 · cites 5063
We 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, unde…
Markus K. Brunnermeier, Lasse Heje Pedersen
arXiv · arXiv · 2023
In this paper, we consider a generic interest rate market in the presence of roll-over risk, which generates spreads in spot/forward term rates. We do not require classical absence of arbitrage and rely instead on a minimal market viability assumption, which enables us to work in the context of the benchmark approach. In a Markovian setting, we extend the control theoretic approach of Gombani & Runggaldier (2013) and…
Claudio Fontana, Simone Pavarana, Wolfgang J. Runggaldier
arXiv · arXiv · 2021
This article is part of a comprehensive research project on liquidity risk in asset management, which can be divided into three dimensions. The first dimension covers the modeling of the liability liquidity risk (or funding liquidity), the second dimension is dedicated to the modeling of the asset liquidity risk (or market liquidity), whereas the third dimension considers the management of the asset-liability liquidi…
Thierry Roncalli
arXiv · arXiv · 2021
This article is part of a comprehensive research project on liquidity risk in asset management, which can be divided into three dimensions. The first dimension covers liability liquidity risk (or funding liquidity) modeling, the second dimension focuses on asset liquidity risk (or market liquidity) modeling, and the third dimension considers the asset-liability management of the liquidity gap risk (or asset-liability…
Thierry Roncalli, Amina Cherief, Fatma Karray-Meziou, Margaux Regnault
arXiv · arXiv · 2021
This article is part of a comprehensive research project on liquidity risk in asset management, which can be divided into three dimensions. The first dimension covers liability liquidity risk (or funding liquidity) modeling, the second dimension focuses on asset liquidity risk (or market liquidity) modeling, and the third dimension considers asset-liability liquidity risk management (or asset-liability matching). The…
Thierry Roncalli, Fatma Karray-Meziou, François Pan, Margaux Regnault
arXiv · arXiv · 2019
Systemic liquidity risk, defined by the IMF as "the risk of simultaneous liquidity difficulties at multiple financial institutions", is a key topic in macroprudential policy and financial stress analysis. Specialized models to simulate funding liquidity risk and contagion are available but they require not only banks' bilateral exposures data but also balance sheet data with sufficient granularity, which are hardly a…
V. Macchiati, G. Brandi, G. Cimini, G. Caldarelli, D. Paolotti
arXiv · arXiv · 2026
We study cash-flow forecasting for derivatives used in liquidity management and clarify its relation to risk-neutral valuation and replication. While it is well known that expectations under different measures (e.g., $\mathbb{P}$ vs. $\mathbb{Q}$) can yield different undiscounted cash-flows, further inconsistencies arise when payment times are stochastic. We show that using discounting sensitivities (funding-curve he…
Christian P. Fries
arXiv · arXiv · 2011
We present a dialogue on Counterparty Credit Risk touching on Credit Value at Risk (Credit VaR), Potential Future Exposure (PFE), Expected Exposure (EE), Expected Positive Exposure (EPE), Credit Valuation Adjustment (CVA), Debit Valuation Adjustment (DVA), DVA Hedging, Closeout conventions, Netting clauses, Collateral modeling, Gap Risk, Re-hypothecation, Wrong Way Risk, Basel III, inclusion of Funding costs, First t…
Damiano Brigo
arXiv · arXiv · 2016
We take the holistic approach of computing an OTC claim value that incorporates credit and funding liquidity risks and their interplays, instead of forcing individual price adjustments: CVA, DVA, FVA, KVA. The resulting nonlinear mathematical problem features semilinear PDEs and FBSDEs. We show that for the benchmark vulnerable claim there is an analytical solution, and we express it in terms of the Black-Scholes for…
Damiano Brigo, Cristin Buescu, Marek Rutkowski
OpenAlex · RePEc: Research Papers in Economics · 2016 · cites 19
The cross-currency basis, which is the basis spread added mainly to the U.S. dollar London Interbank Offered Rate (USD LIBOR) when the USD is funded via foreign exchange (FX) swaps using the Japanese yen or the euro as a funding currency, has been widening globally since the beginning of 2014. This development is driven by (1) increased demands for U.S. dollars resulting from a divergence in the monetary policy betwe…
Fumihiko Arai, Yoshibumi Makabe, Yasunori Okawara, Teppei Nagano
arXiv · arXiv · 2022
Applying historical data from the USD LIBOR transition period, we estimate a joint model for SOFR, Fed Funds, and Eurodollar futures rates as well as spot USD LIBOR and term repo rates. The framework endogenously models basis spreads between each of the benchmark rates and allows for the decomposition of spreads. Modelling the LIBOR-OIS spread as credit and funding-liquidity roll-over risk, we find that the spike in …
David Skovmand, Jacob Bjerre Skov
arXiv · arXiv · 2017
We discuss the binary nature of funding impact in derivative valuation. Under some conditions, funding is either a cost or a benefit, i.e., one of the lending/borrowing rates does not play a role in pricing derivatives. When derivatives are priced, considering different lending/borrowing rates leads to semi-linear BSDEs and PDEs, and thus it is necessary to solve the equations numerically. However, once it can be gua…
Junbeom Lee, Chao Zhou
arXiv · arXiv · 2026
Fundamental-value anchoring of resting liquidity is a causal stabiliser of an order-book market: while the anchor holds, even a heavily leveraged book stays quiet. We take that anchor strength as a continuous control and characterise the endogenous liquidity crises that appear once it is nearly removed. In a single continuous-double-auction market driven by anchored noise traders, chartist herders, a population of fu…
Jan Novotny
arXiv · arXiv · 2026
We develop a continuous-time structural dynamic model to determine the exact insolvency regions of banks arising from the non-linear interaction between liquidity and credit risk. While existing literature predominantly treats these risks in isolation or via reduced-form specifications, we explicitly model the feedback loop where funding shocks and regulatory constraints force balance-sheet adjustments that can lead …
Nader Karimi, Davood Ahmadian
arXiv · arXiv · 2026
An order-book market whose liquidity provision is anchored to a fundamental value carries a restoring force: the price mean-reverts to value and the book refills after a shock. We show this restoring force is a robust intrinsic stabiliser and identify it causally-dialling the anchor down removes the mean-reversion, and a leverage-driven fire-sale then self-sustains. Separately, we ask whether a stressed market transm…
Jan Novotny
arXiv · arXiv · 2026
We introduce $\textbf{Slippage-at-Risk (SaR)}$, a quantitative framework for measuring liquidity risk in perpetual futures exchanges. Unlike backward-looking metrics such as Value-at-Risk computed on historical returns or realized deficit distributions, SaR provides a \emph{forward-looking} assessment of liquidation execution risk derived from current order book microstructure. The framework comprises three complemen…
Otar Sepper
arXiv · arXiv · 2025
Everlasting options, a relatively new class of perpetual financial derivatives, have emerged to tackle the challenges of rolling contracts and liquidity fragmentation in decentralized finance markets. This paper offers an in-depth analysis of markets for everlasting options, modeled using a dynamic proactive market maker. We examine the behavior of funding fees and transaction costs across varying liquidity condition…
Hardhik Mohanty, Giovanni Zaarour, Bhaskar Krishnamachari