Title: Variation in funding liquidity and financial stability risks
Authors: Gregory Bauer - Bank of Canada (Canada) [presenting]
Eleonora Granziera - Norges Bank (Norway)
Abstract: There is evidence that various measures of market liquidity help forecast business cycles. There is also evidence that market liquidity is related to funding liquidity: the ability of financial intermediaries to raise capital and hold levered positions. We examine how time variation in funding liquidity is related to domestic and global financial cycles. As financial cycles may end in financial crises, we also examine whether variation in funding liquidity can help forecast crises. This is of interest as the quantity of private credit (appropriately normalized) is the most robust variable for forecasting crises. We examine whether time variation in the price of credit may increase forecasting power. We construct several different measures of funding liquidity (e.g., betting against beta strategy returns, idiosyncratic volatility, etc.) in a cross section of 18 advanced economies and use panel techniques to assess predictability.