Liquidity Costs Research Articles

Liquidity and Cost Advantage of Green Bonds

The prevailing scholarly consensus suggests that green bonds benefit from a “green premium” by offering a financing cost advantage over conventional bonds. However, our empirical study reveals significant differences in liquidity between green and conventional bonds that could affect this cost advantage. We investigate the variations in liquidity levels between these bond types and explore how these disparities influence the advantage in financing costs associated with green bonds. The findings show that, due to their unique attributes, green bonds tend to have lower liquidity than conventional bonds; this results in higher liquidity costs, which counterbalance the cost benefits of the green premium. The liquidity disadvantage of green bonds thus weakens the overall financing cost advantage they might otherwise offer through the green premium.

MULA, an affordable framework for multifunctional liquid automation in natural- and life sciences with a focus on hardware design, setup, modularity and validation

The implementation of automation has already had a considerable impact on chemical and pharmaceutical industrial laboratories. However, academic laboratories have often been more reluctant to adopt such technology due to the high cost of commercial liquid handling systems, although, in many instances, there would be a huge potential to automate repetitive tasks, resulting in elevated productivity. We present here a detailed description of the setup, validation, and utilization of a multifunctional liquid automation (MULA) system that can be used to automate various chemical and biological tasks. Considering that such a setup must be highly customizable, we also designed MULA with respect to modularity, providing detailed insight as far as possible. Including all 3D-printed parts and the used Hamilton gastight micro syringe, the total construction cost is approximately 700 €. This allows us to achieve a highly reliable and accurate system that exceeds the precision of a classical air displacement pipette while still retaining the ability to use closed vial (septa) setups. To encourage other groups to adopt this setup, detailed instructions and tips for every step of the process are provided, along with the complete CAD design of MULA and control code, which are freely available for download under the CC BY NC 3.0 license.

Bank fundamental dynamics: the role of optimal bank management

PurposeThis study aims to investigate the dynamic relationships between profitability, credit risk, liquidity risk and capital in Indonesian banking industry.Design/methodology/approachThe authors use a panel vector autoregression model that incorporates macroeconomic variables: growth, interest rate, foreign exchange. The analysis is based on a monthly panel data set of 88 banks spanning from January 2012 to September 2021, which comprises 10,296 bank-month observations.FindingsOur key findings highlight (i) permanent credit cost and liquidity cost pass through practices, (ii) complementary function of liquidity and capital, (iii) earning management motivated asset write off and (iv) credit risk-liquidity risk neutrality. In addition, the authors observe that the banks demonstrated resilience to macroeconomic shocks.Research limitations/implicationsOur study have shown some interesting dynamic patterns of fundamentals; nevertheless, unified theoretical underpinning of the process is still unavailable. This should be an important future reasearch avenue.Practical implicationsThe study brings significant implications for regulatory and supervisory practices aimed at enhancing the financial stability of banks.Originality/valueWe conduct estimation of Indonesian banks system in dynamic perspective and perform impulses responses.

Comprehensive Method for Estimating the Time and Expenditures Required for Mine Liquidation Processes of Business Processes

Abstract The European Green Deal (EU Green Deal) has set the direction for the EU’s energy transition towards climate neutrality by 2050. In Poland, this means moving away from the extraction and use of coal. The Social Contract for the Mining Industry signed in 2021 states the necessity of last mine closure by 2049. Mine closure is a complex, lengthy and costly process. A complex scientific solution may concern the use of rational operations and minimization of mine closure costs. This article presents a system for the elementary assessment of the potential time and cost of coal mine liquidation. Estimating coal mine closure costs in the early design phase is an key aspect of supporting the company dealing with mine closure. The aim of the research was to improve the tool for assessing mine liquidation price. The extended assessment solution proposed in the article is formed on base of statistics of past mining institution liquidation processes. This method can, with minor modifications, be used for each restructuring and revitalizing task for mining industries in the process of liquidation. At the core of the developed method is a preliminary data analysis, which should be confirmed by a complex and multi-criteria estimation of the costs of the planned mine liquidation.

Digital payments and bank competition

This article examines how competition between banks and a digital PSP impacts the lending rate and the consumers’ use of payment instruments. The digital PSP offers a digital wallet and payment services, but does not offer credit. In contrast, banks invest their deposits in lending activities, which implies that they may incur some costs of adjusting their liquidity needs when consumers make payments. I show that the adoption of the digital wallet for payments may sometimes increase the volume of payments by bank deposit transfers and the lending rate. This results from banks’ trade-off between lowering their costs of liquidity when consumers pay from their digital wallet and reducing the revenues they receive from bank transfer fees.

Effects of pressure ratio allocation on the flow characteristics in a five-stage ionic liquid compressor

Ionic liquid compressors are a new type of hydrogen compressor technology with significant advantages when applied to high-pressure hydrogen refueling stations, where multi-stage compression is an ideal solution. The utilization of a liquid piston introduces complex two-phase flow phenomena within the cylinders, and understanding the characteristics of two-phase flow is crucial for the thermodynamic performance of the compressor. For the multi-stage compressors, pressure ratio allocation has a significant influence on the structural design and energy conversion efficiency of the compressor, however, there is a lack of relevant research in the existing studies. In this paper, the compression cylinder structures of a five-stage ionic liquid compressor under three pressure ratio allocation strategies are designed, and then the two-phase flow characteristics inside the cylinder are numerically investigated. Based on the analysis of the two-phase flow pattern in the cylinder, the minimum initial liquid heights in each stage that ensure the solid piston is not exposed are determined, and the escape characteristics of ionic liquid and the energy efficiency of the ionic liquid compressor were then analyzed. Under the same total pressure ratio and flow rate, when the consumption cost of ionic liquid was considered as a secondary factor, the strategy of equal pressure ratio allocated for five stages was recommended as the compressor efficiency was higher with better heat transfer performance.

A monetary model of global peace and health

BackgroundThis study aims to expand on the concept of peace and health by drawing from Keynes' theory of the economic consequences of peace, in light of the global pandemic experienced in 2020 due to COVID_19.MethodsIn this paper, I will elaborate on the concept of ‘security’, as an indicator of peace in the time of biological shocks, in order to expand the definition of Keynesian precautionary motivation. This puts forth a new monetary policy model developed to make contributions to achieving global peace. In so doing, I will calculate the optimal growth rate of discount rate through utilizing the Global Peace Index (GPI), adjusted by the Case Fatality Risk (CFR) of COVID-19 in a dynamic shopping time monetary model. This analysis is comprised of the top 15 GDP countries as well as the 10 most and least peaceful countries in 2020.ResultsThe results indicate that households in more peaceful and healthy countries tend to hold less money compared to those in less peaceful and healthy countries. Besides, the discount rate needs to be reduced due to the outbreak of COVID-19 and the decrease in the level of peace in the economy.ConclusionInsofar as the imposition of fines through international legal circles on countries with an insignificant health and peace policy will increase the cost of liquidity, other alternative methods of financing will be affor dable for the countries.

Leverage Strategies of Real Estate Investment Trusts and Real Estate Operating Companies

This paper employs empirical data in three major Asian real estate markets - Hong Kong, Japan, and Singapore, from 2001 to 2021, to study the leverage strategies of two related types of real estate companies – real estate investment trusts (REITs) and real estate operating companies (REOCs). The business model of the former must adhere to a real-estate-focused investment strategy while the latter undertakes a whole range of real estate development activities including land acquisition, financial feasibility analysis, construction, investment and asset management to redevelopment and disposal, and are not subject to the REIT rules with respect to tax transparency, earning distribution, real estate holding and leverage limit. We find that REOCs use 18.96% more debt than REITs after controlling for the agency and market risks, dividend yields, and property sector, country, and year fixed effects of firms; dividend payout has no effect on the leverage strategies; and high tax ratio increases the debt usage of REOCs relative to REITs. We also analyze the liquidation costs and business uniqueness effects. We find real estate value to total firm value ratio, as a proxy of liquidation cost, has negative effects on debt ratios for both real estate firms. Due to their uniqueness, REOCs with a high concentration of rental revenue stream are more vulnerable to liquidation risks, and thus more likely to have lower debt ratio. REITs however tend to have higher debt usage as rental incomes enhance cash-flow liquidity.

An analysis of the market efficiency of the Chinese copper futures based on intertemporal and intermarket arbitrages

This paper studies the market efficiency and relevant issues of the copper futures traded on the Shanghai Futures Exchange (SHFE) in China. Since its listing, the market, grown unceasingly in scale and internationalization level, has become the largest copper futures trading market in the world (the London Metal Exchange (LME) copper futures market is the second largest). Using the data from 2006 to 2022 as a sample, a period covering the outbreak of the COVID-19 pandemic and the internationalization of the Chinese copper futures, this paper analyzes the market efficiency of China’s copper futures based on both intertemporal and intermarket strategies (SHFE Copper Futures and LME Copper Futures, with considering time difference factor). To better reflect the actual situation, this paper, when establishing trading strategy models, not only took into account various actual trading factors such as transaction costs, market impact costs, liquidity costs, margin, and capital costs but also combined daily and high-frequency data to present highly practical arbitrage strategies. According to empirical results, overall, it was not found significant arbitrage opportunities to violate the market efficiency rule. Although some arbitrage opportunities indeed emerged, they were infrequent, especially when transaction costs were considered. Specifically, in terms of the intertemporal strategy, despite that infrequent arbitrage opportunities did appear in the SHFE copper futures market, they failed to bring substantial gains, some of which even caused losses in extreme cases. In terms of the intermarket strategy, there is a cointegration relationship between the logarithmic price of LME copper futures and the logarithmic price of SHFE copper futures. The average annualized rates of return in the results of the in-sample empirical analysis were high, but in the out-of-sample empirical analysis of high frequency and daily data were not found significant arbitrage opportunities. The influence between the LME copper futures market and the SHFE copper futures market was bidirectional.

Optimal liquidation using extended trading close for multiple trading days

The extended trading close (ETC) provides institutional investors an opportunity to trade at the closing price after the regular trading session (RTS) and disclosing the order imbalances to other market participants. ETCs exist in the Nasdaq, the SSE STAR, the SZSE ChiNext and the TWSE. To help a risk-averse institutional investor take advantage of the RTS and the ETC for liquidation, we develop a multistage dynamic programming model including the ETC, and derive recursive solutions for the multiple trading days scenario with closed-form solutions for the scenario with only two trading days. We also verify that the ETC is able to mitigate extreme price movements caused by fast liquidation, which is also a goal of the ETC set out by the SSE STAR and the SZSE ChiNext. Finally, we derive three results. First, an institutional investor can reduce execution costs after the introduction of the ETC. Second, a critical trading day exists, and to avoid prematurely revealing trading intentions, the investor should not trade in the ETC until such day. Third, even though the ETC orders submitted by the investor are unfilled, implementation of the ETC encourages the investor to change the liquidation strategy in the RTS, which reduces extreme price movements. In summary, the practical implications of this paper are that the investor should not trade during the ETC on the front few days to avoid prematurely revealing the investor’s trading intention by unfilled orders in the ETC and that introducing the ETC can reduce liquidation costs and extreme price movements.

The market efficiency analysis of China’s copper options based on risk-free arbitrages

ABSTRACT This paper probes into the market efficiency and relevant issues of copper options, the first industrial options product launched in China and currently the only non-ferrous metals option. Since its listing on 21 September 2018, the copper options market, developing on the fast track, has become the largest copper options market in the world, and thus it is of important meaning to study its market efficiency. Taking the data of China’s copper options market from its debut to 30 April 2022 as a sample, this paper studies the efficiency of this market using three typical risk-free arbitrages such as put-call-future parity arbitrage, box spread arbitrage, and boundary arbitrage strategies. To better reflect the actual situation, this paper, when establishing options arbitrage strategy models, not only took into account various actual trading factors such as transaction costs, market impact costs, liquidity costs, margin, and capital opportunity costs but also combined daily and high-frequency data to present highly practical arbitrage strategies. According to empirical results, there are few arbitrage opportunities with a very low proportion when actual trading factors were considered. Overall, no evidence was found to prove that China’s copper options market significantly violates the market efficiency rule.

Frequent Auctions for Intraday Electricity Markets

Continuous trading is currently becoming the standard for intraday electricity markets. In this paper, we propose frequent auctions as a viable alternative. We argue that batching orders in auctions potentially leads to lower liquidity cost, more reliable, less noisy price signals, and allows for better alignment of market outcomes with the technical realities of the transmission grid. In an empirical study, we compare the German continuous intraday market with counterfactual outcomes from frequent auctions. We find that traded volumes tend to be higher for continuous trading; however, the auction market benefits from lower liquidity costs and less noisy price signals. Furthermore, we critically discuss the suitability of continuous trading in the presence of network constraints and technical restrictions of conventional units. Taken together these findings suggest that in sparsely traded intraday markets, pooling orders in frequent auctions may be beneficial.

Smartphone Trading Technology, Investor Behavior, and Mutual Fund Performance

Using proprietary individual-level trading data around a natural experiment—the release of a smartphone trading app by a large investment advisor—this study investigates how smartphone trading technology affects retail investor behavior and mutual fund performance. App adoption by retail investors leads to an increase in investor attention and trading volume. App adopters’ flows become more sensitive to short-term fund returns and market sentiment, resulting in higher aggregate flow volume among adopters. The funds more exposed to the shock experience a greater decline in abnormal returns, likely attributable to higher fund flow volume and liquidity costs. As a result, both adopters and nonadopters experience a decline in their mutual fund investment returns. This paper was accepted by Lin William Cong, finance. Funding: The W. Edwards Deming Center and the Eugene Lang Entrepreneurship Center at Columbia University provided funding to support this research. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2021.02099 .

Liquidity risk in FinTech lending: Early impact of the COVID-19 pandemic on the P2P lending market

This study empirically investigates the impact of the COVID-19 pandemic on the liquidity risk incurred by the peer-to-peer (P2P) lending market. As the pandemic adversely affects financial markets globally, a better understanding of the dynamics of successful P2P lending is necessary under the conditions of financial distress. By using the cross-country database of secondary market listing outcomes at Bondora (Estonia) and employing probit, ordered probit and tobit regression methods, we provide evidence of the pandemic-induced exposure to liquidity risk in the P2P lending market. Despite increased volatility in the financial markets, results show that COVID-19 risk increases the probability of successful listing during the pandemic. However, this outcome comes at significant liquidation costs for investors in the form of higher premiums. Further analysis based on listing outcomes and loan characteristics shows a negative association between COVID-19 risk and share of overdue loans and average overdue days in secondary market listings. Simultaneously, more experienced investors dominate the market as COVID-19 risk increases, a trend that is reflected in shorter listing times. The findings of this study imply certain early tendencies in financial markets during pandemic-induced turmoil and open new avenues for further research.

Preventing runs under sequential revelation of liquidity needs

I examine whether a financial intermediary issuing demandable debt can eliminate run equilibria by properly adjusting or restricting payouts in case of heavy redemptions. I study a model where investors learn their own liquidity needs over time and may withdraw preemptively before knowing their future liquidity needs. The difficulty in preventing runs is that, on the one hand, imposing temporary restrictions on withdrawals in case of excess redemptions may be necessary to avoid costly asset liquidations, while on the other hand, it is precisely the prospect of such restrictions on withdrawals that may induce investors to withdraw preemptively. Implementation of the first-best allocation without a run equilibrium is possible if and only if either liquidation costs are not too high or investors are not too risk averse.

Approaches to the Assessment of Environmental Risks of Investment Activity

The article discusses the impact of environmental risks on the results of investment activities. The initial premise of the study uses an ESG approach to the management of investment and construction activities, which takes into account the influence of environmental and social factors on the effectiveness of investments and recognized by researchers as the most relevant to the current stage of economic development. The urgency of the problem is determined by the need to include environmental and social factors in the process of making investment decisions to reduce the impact of project risks. The purpose of the study was to identify such approaches to the ecological and economic assessment of investments that allow taking into account the environmental component when determining the required amount of one-time and current costs. Also provide information to solve the problem of choosing «prevention or elimination» of the consequences of the influence of negative environmental factors. It is shown that one of the problems of environmental risk assessment is an unfavorable «risk — return ratio». This is the basis for making investment decisions in a risk environment. Getting any type of effect from a project (financial, social, general economic) is always associated with uncertainty. The possibility of setting a task in relation to environmental risks as a comparison of the costs of liquidation or prevention of damage is substantiated. The authors analyzed the general trends in the direction of investments in environmental protection measures at the regional level. An example of calculating the cost of compensation for damage from land pollution is given.

Effect of sectoral holdings on the flow-performance sensitivity of mutual funds

We find that the flow-performance sensitivity (FPS) of mutual funds depends on the composition of their sectoral holdings. We use the Morningstar classification of fund holdings into the following three Super Sectors: Defensive, Sensitive, and Cyclical. On average, the FPS decreases as the fraction of defensive or sensitive stocks increases in the fund’s portfolio. The FPS increases as the fraction of cyclical stocks increases. During high sentiment periods, the sensitivity of new sales as well as redemptions increases, resulting in overall higher FPS for all funds. However, in both the low and the high sentiment periods, the FPS is lower for funds with a higher fraction of defensive or sensitive stocks and higher for funds with a higher fraction of cyclical stocks. Investors with a long investment horizon may wish to avoid mutual funds that invest primarily in cyclical stocks as funds with high FPS tend to have high liquidity costs.

Implicit Hedging and Liquidity Costs of Structured Products

This article analyzes the implicit hedging and liquidity costs of structured equity products offered by various financial institutions. We replicate several payoffs of structured products, compare the calculated fair values based on the Heston model as well as geometric Brownian motion, using various optimization techniques, and compare their fair values with the historic prices traded in the market. We find that implicit hedging costs range between 0.9% and 2.9% markup on the fair value, where we find the underlying market volatility to be the relevant driver of this range for complex structures, while market liquidity can be extracted as the only driver of markups for simple structures with no hedging requirements.

Real Estate Appraisal Using the Liquidation Cost Method – A Case Study

Abstract A real estate appraiser, using the liquidation cost method of the mixed approach in order to determine the value of real estate, analyzes, e.g. the value of post-demolition materials and the costs of liquidating components. The paper presents the problem of determining the costs of demolition works, which are correlated with the adopted demolition technology, the method of managing waste from post-demolition materials, and the costs incurred to maintain the occupational health and safety of employees and bystanders. Important elements of determining the demolition costs include the type of demolition waste and the relevant classification subgroup, the used demolition technology, and also the method of managing waste materials. The publication presents a calculation example that concerns the cost analysis of the demolition of a building structure. The demolition was performed using the mechanical method. The presented analyses cover different variants of carrying out works, whereas optimization refers to the different types of equipment used, available employee resources, and the various ways of recycling/managing post-demolition materials (storing, resale or processing). The conducted analyzes allow a multi-faceted approach to the subject matter to be obtained, and also an optimal solution to be selected by the participants of the investment process.

Determinants and effects of trade credit financing: Evidence from the maritime shipping industry

AbstractThis paper investigates the factors and effects of trade credit, as an alternative source of capital, by employing a generalized method of moments instrumenting for endogeneity based on a panel data set of public maritime shipping companies and compatible companies in other industries. Our study shows that the magnitude of trade credit is affected by profitability, financial leverage, company size, cost of capital, financial distress, institutional ownership, corporate power, corporate liquidity, asset intensity, and corporate growth. It also suggests that trade credit affects financial performance, equity value, and risk. These empirical findings yield important implications for principal financial officers, as discussed herein.