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Journal of Finance Vol. 73 No. 1 2018

Measuring Liquidity Mismatch in the Banking Sector

Jennie Bai1,2,3,4,5,6; Arvind Krishnamurthy1,2,3,4,5,6; CHARLES-HENRI WEYMULLER1,2,3,4,5,6

1 National Bureau of Economic Research · 2 University of Rhode Island · 3 Georgetown University · 4 Institut d'Etudes Politiques de Paris · 5 New York University · 6 Stanford University

open access

Abstract

This paper constructs a liquidity mismatch index (LMI) to gauge the mismatch between the market liquidity of assets and the funding liquidity of liabilities, for 2,882 bank holding companies over 2002 to 2014. The aggregate LMI decreases from +$4 trillion precrisis to −$6 trillion in 2008. We conduct an LMI stress test revealing the fragility of the banking system in early 2007. Moreover, LMI predicts a bank's stock market crash probability and borrowing decisions from the government during the financial crisis. The LMI is therefore informative about both individual bank liquidity and the liquidity risk of the entire banking system.

DOI
10.1111/jofi.12591
Volume
73
Issue
1
Pages
51-93
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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