Liquid Reserves Research Articles

Based on Symmetric Jump Risk Market: Study on the Ruin Problem of a Risk Model with Liquid Reserves and Proportional Investment

In order to deal with complex risk scenarios involving claims, uncertainty, and investments, we consider the ruin problems in a compound Poisson risk model with liquid reserves and proportional investments and study the expected discounted penalty function under threshold dividend strategies. Firstly, the integral differential equation of the expected discounted penalty function is derived. Secondly, since the closed-form solution of the equation cannot be obtained, a sinc method is used to obtain the numerical approximation solution of the equation. Finally, the feasibility and superiority of the sinc method are illustrated by error analysis. In addition, based on a symmetric jump risk market, we discuss the influence of some parameters on the ruin probability with some examples. This study can help actuaries develop more robust risk management strategies and ensure the long-term stability and profitability of insurance companies. It provides a theoretical basis for actuaries to carry out risk management.

Numerical method for a compound Poisson risk model with liquid reserves and proportional investment

<abstract><p>In this paper, a classical risk model with liquid reserves and proportional investment is considered, and the expected total discounted dividend before ruin of insurance companies under the threshold dividend strategy is studied. First, the integral differential equations of the expected total discounted dividend before ruin satisfying certain boundary conditions is derived. Second, since the explicit solutions of the equations cannot be obtained, the numerical approximation solutions are obtained by the sinc approximation method. Finally, we discuss the effects of parameters such as risk capital ratio and liquid reserve on the expected total discounted dividend before ruin by some examples.</p></abstract>

Empirical Evidence on the Impact of the Banking Sector on the Sierra Leone Economy

The study seeks to assess the impacts of the banking sector on the Sierra Leone economy. The Case study research design was adopted for this study. The Pooled OLS regression Model, Correlation Matrix, and Descriptive Statistics were employed in the study. E-Views was used to analyze the panel data using the Pooled OLS regression data, Descriptive statistics, and the Correlation Matrix. The Pooled OLS econometric result shows that Bank Liquid Reserves to Assets positively correlates with Gross Domestic Product with a coefficient value of 0.8425. It was further revealed that the relationship is highly significant (p-value of 0.0158 and a t-stat of 2.4560. Domestic credit to the Private Sector has a negative relationship with the Gross Domestic Product with a coefficient value of (-0.155367). This relationship was further revealed to be highly insignificant (p-value of 0.7533 and t-stats of -0.3152). The result also shows that Deposit Interest Rates have a positive coefficient value of (2.1040), which is also highly significant (p-value of 0.0013 and t-stats of 3.3050). The study further revealed that the Gross Domestic Product (% of GDP) has a negative relationship with the GDP, with a coefficient value of (-0.2055). It further revealed that the result is highly insignificant (p-value of 0.1383 and t-stats of -1.4944). On the other hand, Interest rate spread has a negative relationship with the Gross Domestic Product with a coefficient value of (- 3.0265). It was further revealed that the relationship is highly significant (pvalue of 0.0000 and t-stats of -4.8611)

Do the Same Determinants Affect Banks’ Profitability and Liquidity? Evidence from West Balkan Countries Using a Panel Data Regression Analysis

This study aims to determine whether the same bank-specific and macroeconomic determinants affect banks’ profitability and liquidity. To achieve the set goal, panel data regression analysis was applied with fixed effects or random effects depending on the results of the Hausman test, as explained in the Results. The research is based on the use of aggregate data on bank-specific and macroeconomic determinants of banks’ profitability and liquidity in West Balkan countries during the period from 2007 to 2022. The dependent variables in the study are ROA, ROE used as proxies for banks’ profitability, and banks’ liquid reserves to banks’ total assets as a proxy for banks’ liquidity. The findings confirm that the bank-specific and macroeconomic determinants affect both banks’ profitability and liquidity in the same direction, except for a few variables. The main contribution of this research is a comprehensive and parallel view of banks’ profitability and liquidity determinants that enables a guide for bank management to better understand the significance of bank-specific and macroeconomic determinants’ effects on their business. The obtained results can improve the balance between the two important principles of banking business.

Analisis Faktor-Faktor Yang Berpengaruh Terhadap Cash Holding pada Perusahaan Manufaktur Yang Terdaftar di Bursa Efek Indonesia Tahun 2018 – 2021

This study aims to test and analyze the factors affecting cash holding in the manufacturing industry listed on the Indonesia Stock Exchange from 2018 to 2021. Factors considered in this study include profitability, leverage, and liquidity. The population used in this study is the manufacturing industry and listed on the Indonesia Stock Exchange (IDX) with a total sample of 67 samples using the purposive sampling method. Multiple linear regression analysis is used via SmartPLS 3. The test results on the profitability variable show that the profitability variable has a negative effect on cash holding. Companies with high profits, then companies will tend to use their cash balances to develop business, add assets, meet investment opportunities, so that funds are not included in cash holding funds. Test results on variable leverage show that variable leverage negatively affects cash holding. Cash ownership is inversely proportional to leverage, so the relationship between these variables is negative because if internal funds are not enough, the company will use its liquid reserves, namely cash holding, before issuing debt. The test results on the liquidity variable show that the liquidity variable has a positive effect on cash holding. In line with the results of research which states that liquidity has a positive effect on cash holding. The findings of this study can be useful for policymakers, investors, and managers in formulating strategies to optimize cash holding in the manufacturing industry.

Robust Dividend, Financing, and Reinsurance Strategies Under Model Uncertainty with Proportional Transaction Costs

This article studies the robust dividend, financing, and reinsurance strategies for an ambiguity aversion insurer (AAI) under model uncertainty. The AAI controls its liquid reserves by purchasing proportional reinsurance, paying dividends, and issuing new equity. We consider model uncertainty and suppose that the AAI is ambiguous about the liquid reserves process, which is described by a class of equivalent probability measures. The objective of the AAI is to maximize the expected present value of the dividend payouts minus the discounted costs of issuing new equity before bankruptcy under the worst-case scenario. A detailed proof of the verification theorem is shown for the robust singular-regular problem. We obtain the explicit solutions of the robust strategies, which are classified into three cases. Numerical results are also presented to show the impacts of the ambiguity aversion coefficient, and the transaction cost factor.

Status and Prospects of Federal Budget Sustainability in the New Environment

The sustainability of the federal budget is currently subject to multiple risks. Despite a temporary increase in oil prices, federal budget revenues are declining rapidly. As correlation analysis has shown, oil and gas revenues of the federal budget become more volatile during structural crises. At the same time, non-oil and gas revenues are declining. The instability of the foreign policy situation and the ongoing military actions greatly increase the risks of increased federal budget expenditures. In the short term, the budget deficit can be covered by the accumulated liquid reserves of the National Welfare Fund. However, in the longterm perspective, the restrictions affecting Russia’s sustainable economic growth will have an impact on the fiscal sphere. The government will have to take unpopular measures to reduce expenditures and raise taxes on the non-oil and gas sector in order to maintain the stability of the public finance system.

Stochastic differential game strategies in the presence of reinsurance and dividend payout

<p style='text-indent:20px;'>This paper presents and examines a problem in which two insurance companies apply non-proportional reinsurance to control risk. Additionally, each firm pays out dividends. The situation is modelled as a zero-sum stochastic differential game between the two companies. The goal of one company is to maintain business competitive advantage over the other by sustaining or increasing the difference between the respective liquid reserves of the two companies while the second company aims to minimise that difference. A verification theorem is formulated, proved and subsequently employed to derive the saddle point components. For the case of the payoff with a non-zero running cost function, we are able to solve explicitly the differential game. Numerical simulations are presented to illustrate the results as well as the economic interpretation.</p>

ASSESSING CREDIT RISK AND LENDING PATTERNS IN THE NIGERIAN BANKING SECTOR

This article aimed to assess credit risk and lending patterns in the Nigerian banking sector. It collected secondary data in yearly time series from 2007 to 2020 to analyze nonperforming loans, liquid reserves to asset ratio, capital-to-asset ratio, domestic credit, and exchange rate and their effects on the Nigerian lending rate. The constructed and analyzed model was estimated via the least square technique to achieve its goals. The findings of this research reveal a beneficiary influence of nonperforming loans, capital-to-asset ratio, and the exchange rate on the bank lending rate. While liquid reserves to asset ratio and domestic credit exhibit inverse relation with the lending rate. Hence, the relationship between nonperforming loans, liquid reserves to asset ratio and domestic credit are statistically significant with the lending rate. Capital-to-asset ratio and exchange rate exhibit an insignificant correlation with the lending rate. The research suggests that private individuals and business entities should exercise caution when taking out loans and ensure that the total amount borrowed is sufficient to cover all of their needs. Banks must use caution when making loans; the prime motive for lending money should not be merely to make a profit. Credit risk is considered substantial; banks need to lower the nonperforming loan portfolio, and by this, both banks and their clients will experience great benefits.

INFLUENCE OF MONETARY POLICY INSTRUMENTS AND INDICATORS ON DYNAMICS OF FINANCING INNOVATION: EMPIRICAL EVIDENCE

Today innovations are drivers of countries’ economic growth, competitiveness, security, and sustainable development. Financial policy and its instruments play a significant role in innovation management, and monetary instruments are one of the most important components of financial policy. Therefore, the necessity of increasing the efficiency of financial support for innovation development actualizes the study of the impact of the monetary policy instruments and indicators on the level of financing innovation. The aim of the article is to improve the scientific basis for the study of the impact of monetary policy instruments and indicators on the dynamics of financing innovation based on empirical evidence. Information basis of the research was formed from the data for Ukraine and 12 post-soviet and other countries with similar starting economic conditions for 2010-2019, taking into account the availability of statistics from the International Monetary Fund, the World Bank, and the central banks for the whole investigated indicators at the time of the study. The software base included Excel and STATA. The methods of regression (linear regression model with panel-corrected standard errors) and correlation analysis (calculating Pearson and Spearman coefficients) were applied to identify a relationship between monetary instruments and indicators and indicator of financing innovation, confirm the hypothesis about the impact of the monetary instruments and indicators on the financing innovation and formalize this effect. To strengthen the country’s innovation development, it is proved the expediency of lowering the discount rate and real interest rate, increasing “broad money” on general reserves, and increasing liquid reserves on bank assets, as well as the transition to inflation targeting. According to the calculations, for all monetary instruments and indicators, except the discount rate, the directions of influence in Ukraine and the panel from 12 other countries were opposite. This one confirms that monetary instruments in Ukraine are not fully performing their regulatory function, in the context of stimulating innovation development.

Liquidity Shocks and The Bank Lending Channel: Evidence from Lower-Middle Income Economies

This paper examines the impacts of central banks’ liquidity injections on commercial banks’ credit supply in thirty-two lower-middle income economies over the period 1990 until 2020. We use a SVAR panel model to analyze the dynamic interactions between the central bank balance sheet policy, bank liquidity, and bank lending. The results show that liquidity injections have a non-significant impact on the credit to the private sector and a persistent positive impact on banks’ liquid reserves. These results confirm the inefficiency of the bank lending channel in transmitting the central bank balance sheet monetary policy to the real economy in the considered LMIC’s.

Interest on reserves, bank runs and investment decisions

PurposeThis paper aims to study the effects of interest on reserves (IOR) on banks’ behavior in a theoretical framework.Design/methodology/approachThis paper introduces IOR into both Cooper and Ross (1998) and Cooper and Ross (2002) and conducts quantitative analysis. It thoroughly examines the effects of IOR on banks’ resource allocation decisions under different assumptions.FindingsIn the model without deposit insurance, the results of this paper show that paying IOR facilitates the bank to use the run-proof contract. When the run-admitting contract is adopted, there is a set of conditions under which the bank is indifferent between holding illiquid asset and excess liquid reserves. In the model with deposit insurance, the results show that if the riskless illiquid investment is profitable and available, then paying IOR can hardly influence the bank's resource allocation. If the riskless illiquid investment is limited, then a certain level of IOR could fulfill some monetary targets.Originality/valueLittle research has combined IOR and model of bank runs. It helps to extend the theoretical analysis in this perspective.

Sudden Stops and Reserve Accumulation in the Presence of International Liquidity Risk

We propose a small open economy model where agents borrow internationally and invest in liquid foreign assets to insure against liquidity shocks, which temporarily shut out the economy of short-term credit markets. Due to the presence of a pecuniary externality individual agents borrow too much and hold too little liquid assets relative to a social planner. This ineffciency rationalizes macroprudential policy interventions in the form of reserve accumulation at the central bank coupled with a tax on foreign borrowing. Unless combined with other measures, a tax on foreign borrowing is detrimental to welfare; it reduces agents’ incentives to invest in liquid assets and thereby increases financial instability. Our model can quantitatively match the simultaneous depreciation of the exchange rate and contractions in output, gross trade flows, foreign liabilities and liquid reserves during Sudden Stop episodes.

Stability in the banking industry and commodity price volatility: perspective from developing economies

PurposeThis paper aims to examine the effect of volatility in prices of internationally traded commodities (the backbone of most economies) on the stability of the banking industry from three main perspectives; bank liquidity reserves, overall bank risk and bank capital adequacy.Design/methodology/approachData were compiled from various sources for 30 emerging economies from 2002 to 2018 and were analyzed using the two-step system generalized method of moments estimation technique.FindingsThe study finds that all things being equal, the magnitude and direction of impact of commodity price volatility on bank stability among economies in Sub-Saharan African (SSA) depend on the type and nature of the commodity in question; and the bank stability proxy used. For instance, an increase in crude oil prices is found to foster stability in the banking industry (proxied by bank liquid reserves) but insignificant when stability in the banking industry is proxied using other banking sector parameters. Additionally, government effectiveness and corruption control have varying moderating influences on how volatility associated with prices of internationally traded commodities influence various proxies for banking industry stability.Originality/valueThis study highlights the effect of fluctuations in prices of key internationally traded commodities (adjusted for foreign exchange impact) that are important sources of revenue among economies in SSA on banking sector stability from liquidity, overall risk and capital adequacy perspectives. The influential role of governance in the relationship between volatility in the price of commodities and bank stability is also revealed by the study.

Generative Well-Pattern Design Presents Opportunities To Reduce Drilling Expenditures

This article, written by JPT Technology Editor Chris Carpenter, contains highlights of paper SPE 203152, “Generative Well-Pattern Design Applied to a Giant Mature Field Leads to the Identification of Major Drilling Expenditure Reduction Opportunities,” by Maddalen Lepphaille, Total; Arthur Thenon, Modis; and Pierre Bergey, Total, et al., prepared for the 2020 Abu Dhabi International Petroleum Exhibition and Conference, Abu Dhabi, held virtually 9–12 November. The paper has not been peer reviewed. A generative well-pattern-design (GWPD) work flow was benchmarked against traditional manual designs to leverage three reservoir-development planning opportunities applicable to a giant mature Middle Eastern carbonate field. People remained central in ensuring efficient problem setup and exploration guidance, but the work flow proved able to identify substantially better patterns than the traditional approach for each of the opportunities at the cost of only a few hundred simulations. GWPD Overview The work flow used to tackle the different problems of this study, which the authors call the GWPD “well-improvement scheme” (WISH), consists of the following steps. Each step is detailed in the complete paper. 1. Definition of design space 2. Constraint of design space 3. Qualification of design space 4. Nondominated sorting (a specific ranking of all of the cells of the con-strained design space according to the value of their quality indicators) 5. Candidate design investigation 6. Investigation of preferred designs 7. Optimization of preferred design GWPD Application Context. The application study was con-ducted at the beginning of the industrialization of WISH, a proprietary software tool dedicated to GWPD. The authors call the work flow GWPD-WISH. In the studied oil field, more than 400 oil producers and water- or gas-injector strings have been drilled from approximately 100 platforms in a series of reservoirs. The study focused upon two specific reservoirs holding most of the field reserves. These reservoirs are developed with peripheral water injection and gas injection into the gas cap. According to the latest development plan, hundreds of wells will be drilled during the next 40 years in order to maintain a production plateau. The context was deemed favorable because a 3D gridded dynamic reservoir model was available, the geology and development history defined a large and complex design problem, and large liquid hydrocarbon reserves were thought to remain. While the software and method used enables considering an ensemble of realizations capturing reservoir uncertainties, only a single history-matched realization of the model was available. Consequently, the study did not deal with reservoir uncertainties.

Optimal investment strategies for an insurer with liquid constraint

In the present paper, we investigate the optimal investment strategies for an insurer with the liquid constraint. The insurer’s surplus is modeled by a Lévy process. The insurer can invest in N risky assets and a risk-free asset. However, in reality, the insurer needs to keep partial amount of his wealth as liquid reserves to meet with the management, which is called as the liquid constraint. We assume that the liquid reserve is a proportion of the insurer’s wealth. Using the martingale approach, we derive the explicit optimal investment strategies for both CARA and quadratic utilities.

The impact of quantitative easing on liquidity creation

• We study the impact of the Fed’s three rounds of QE on bank liquidity creation. • Banks create liquidity by financing illiquid assets with liquid liabilities. • We use a sample of US banks over 2006-14 and a difference-in-difference methodology. • Banks more exposed to QE increased lending during the first and third round of QE. • Liquidity creation among treated banks was higher only during the last round of QE. We study the effects of the US Federal Reserve’s large-scale asset purchase programs during 2008–2014 on bank liquidity creation. Banks create liquidity when they transform the liquid reserves resulted from quantitative easing (QE) into illiquid assets. As the composition of banks’ loan portfolio affects the amount of liquidity it creates, the impact of quantitative easing on liquidity creation is not a priori clear. Using a difference-in-difference identification strategy, we find that banks more affected by the policy increased lending relative to those less affected, mainly during the first and third round of QE. However, we only find a strong effect of the policy on liquidity creation during the third round of QE. This points to a weaker impact on the real economy during the first two rounds, when more exposed banks transformed the reserves created through QE into less illiquid assets, such as real estate mortgages.

Winter is possibly not coming: Mitigating financial instability in an agent-based model with interbank market

We develop a macroeconomic agent-based model to study how financial instability can emerge from the co-evolution of interbank and credit markets and the policy responses to mitigate its impact on the real economy. The model is populated by heterogenous firms, consumers, and banks that locally interact in different markets. In particular, banks provide credit to firms according to a Basel II or III macro-prudential frameworks and manage their liquidity in the interbank market. The Central Bank performs monetary policy according to different types of Taylor rules. We find that the model endogenously generates market freezes in the interbank market, which interact with the financial accelerator, possibly leading to firm bankruptcies, banking crises and the emergence of deep downturns. This requires the timely intervention of the Central Bank as a liquidity lender of last resort. Moreover, we find that the joint adoption of a three mandate Taylor rule tackling credit growth and the Basel III macro-prudential framework is the best policy mix to stabilize financial and real economic dynamics. However, as the Liquidity Coverage Ratio spurs financial instability by increasing the pro-cyclicality of banks’ liquid reserves, a new counter-cyclical liquidity buffer should be added to Basel III to improve its performance further. Finally, we find that the Central Bank can also dampen financial instability by employing a new unconventional monetary-policy tool involving active management of the interest-rate corridor in the interbank market.

Banks as Liquidity Multipliers

Banks hold large amounts of high-quality liquid assets while relying predominantly on deposit funding. The return on these assets is often lower than the cost of deposits. Why do banks engage in such a negative carry trade? Using a novel observation on global games, we build a tractable model where banks manage liquidity risk by adjusting the size of their short-term liabilities and of their liquid reserves consisting of safe, liquid government bonds. Banks are the natural buyers of government bonds because holding these assets enables them to multiply liquidity'': using one unit of bonds to back more than one unit of short-term debt while keeping their liquidity risk unchanged. How much more is measured by the slope of an endogenous iso-risk curve. This liquidity multiplier is key to understand a bank's joint choice of leverage and liquid reserves and how these decisions connect to the pricing of liquid assets. In turn, this provides an explanation of the negative carry puzzle.

The Impact of Quantitative Easing on Liquidity Creation

We study the effects of the US Federal Reserve’s large-scale asset purchase programs during 2008-2014 on bank liquidity creation. Banks create liquidity when they transform the liquid reserves resulted from quantitative easing into illiquid assets. As the composition of banks’ loan portfolio affects the amount of liquidity it creates, the impact of quantitative easing on liquidity creation is not a priori clear. Using a difference-in-difference identification strategy, we find that banks that were more exposed to the policy increased lending relative to a control group. However, while the increase in lending was present across all three rounds of quantitative easing, we only find a strong effect on liquidity creation during the last round. This suggests, that during the first two rounds, affected banks transformed the reserves created through the asset purchase program into less illiquid assets, such as real estate mortgages, pointing to a weaker impact of the policy on the real economy.