Liquidity Costs Research Articles

Optimal execution with liquidity risk in a diffusive order book market

We study the optimal order placement strategy with the presence of a liquidity cost. In this problem, a stock trader wishes to clear her large inventory by a predetermined time horizon T. A trader uses both limit and market orders, and a large market order faces an adverse price movement caused by the liquidity risk. First, we study a single period model where the trader places a limit order and/or a market order at the beginning. We show the behavior of optimal amount of market order, [Formula: see text], and optimal placement of limit order, [Formula: see text], under different market conditions. Next, we extend it to a multi-period model, where the trader makes sequential decisions of limit and market orders at multiple time points.

Liquidity Capacity and Financial Performance of Commercial Banks in Kenya

Purpose: The objective of the study was to assess the impact of liquidity capacity on the financial performance of commercial banks in Kenya.
 Methodology: This study employed the explanatory research design. The 42 Kenyan commercial banks were the study's target population. The essential financial data for analysis was extracted and compiled using a data collection routine from the yearly reports. Panel data was mined from 42 commercial banks for six years between 2012 and 2018. The data were assessed by employing descriptive statistics as well as inferential statistics. Descriptive statistics employed involved the standard deviation, median, and average. Inferential statistics used involved panel regression. The data analysis was aided by STATA software.
 Findings: The findings from the regression analysis indicate that Net Stable Funding and Liquidity Coverage exert a significant positive impact on the financial performance of commercial banks in Kenya. Conversely, provisioning for Non-Performing Loans, Liquidity Gap, and Provisioning for Nonperforming Loans demonstrate a notable negative effect on the financial performance of commercial banks in the country. Moreover, the study reveals that bank competition plays a significant moderating role in the relationship between liquidity capacity and the financial performance of commercial banks in Kenya.
 Unique Contribution to Theory, Practice and Policy: The study was anchored on Anticipated Income Theory and Liquidity Preference Theory. The study recommended that the regulatory body for commercial banks, the CBK, facilitates open channels of communication between policy makers and senior management of commercial banks in Kenya. This discussion is critical to ensuring that the monetary policies developed are practical and beneficial to the expansion of the commercial banking industry. Lastly, the study suggests that all commercial banks in Kenya integrate considerations of liquidity costs, benefits, and risks into their performance measurement, pricing, and approval processes for significant business activities.

The Analysis of the Structure of Mining Plants Liquidation Outlays

Restructuring of coal mines requires significant budgetary expenditure. A complex scientific approach will facilitate the conduction of the management of costs of hard coal mines liquidation. An analysis of the costs of the mine’s liquidation was carried out on an annual basis with the division for subsequent years of the course of processes. The presented method of signalling costs that has gone beyond the structure of acceptable values developed for 20 years of operations of SRK S.A. is a useful tool for the cost management in the field of mining plants liquidation. Not only the method can be used for the initial costs’ estimation of mining plants liquidation, but it can be used as a cost management tool as well. After some modifications, the method can be also used by any enterprise conducting the management of assets of mines put into liquidation as a comparative tool for multi–criteria cost estimation of planned mines liquidation. The tool may increase the efficiency and effectiveness of mining plant liquidation processes.

Catching the Fast Payments Trend: Optimal Designs and Leadership Strategies of Retail Payment and Settlement Systems

Recent financial technologies have enabled fast payments and are reshaping retail payment and settlement systems globally. We developed an analytical model to study the optimal design of a new retail payment system in terms of settlement speed and system capability under both bank and fintech firm heterogeneous participation incentives. We found that three types of payment systems emerge as equilibrium outcomes: batch retail (BR), expedited retail (ER), and real-time retail (RR) payment systems. Although the base value of the payment service positively affects both settlement speed and system capability, the expected liquidity cost negatively impacts settlement speed, and total transaction volume and technological effectiveness positively impact system capability. We identified three leadership strategies to maximize social welfare: the government mandate (GM) strategy, the fintech-inclusive (FI) strategy, and the fintech-exclusive and bank-exclusive (FE+BE) strategy. When the base value of the payment service is either low or high, the GM strategy leads to a socially optimal unified system. When the base value of the payment service is in the intermediate range, and if fintech firms have a significant technological advantage over banks, then both GM and FI strategies result in a socially optimal unified system; otherwise, the FE+BE strategy results in a socially optimal fragmented system. Further, we proposed a Shapley-value-based cost-sharing rule under the GM strategy to fairly allocate social welfare among the system participants. Our findings offer important policy insights into the optimal system designs, leadership strategies, and the government regulator’s role in shaping future innovations in the payments industry.

Modernising intra-day liquidity optimisation for commercial banks

Commercial banks are facing a period of exceptionally difficult funding conditions amidst a challenging economic environment. To address this, banks need to optimise their liquidity flows and usage. But existing liquidity optimisation and management methods fall short of materially reducing liquidity costs and can generate large operational risks. This paper describes how advanced analytics and algorithms can be used to optimise liquidity flows and usage in a real-time environment through payment resequencing. This approach can enable banks to significantly and consistently reduce liquidity usage and costs, potentially turning more effective treasuries into profit centres. This paper also describes the fundamental requirements for embarking on a modern liquidity optimisation project and also presents some recommendations for best practices in operational and technological infrastructure.

Optimal Leveraged Portfolio Selection Under Quasi-Elastic Market Impact

Dangers of Ignoring Market Friction When Leveraging Financial PortfoliosPortfolio leveraging is a standard industry practice to target higher fund returns, for example, in risk parity asset allocation. However, the existing models of optimal bet sizing fail to integrate analytically the impact on leveraged portfolio selection resulting from market liquidity issues. The paper “Optimal Leveraged Portfolio Selection Under Quasi-Elastic Market Impact” considers a market in which both temporary and permanent impact on trading prices are present with the former impact being sufficiently large relative to the latter. Our analytical conclusions, supported by a case study that uses even relatively more liquid U.S. exchange-traded fund assets, demonstrate that fund managers are ill advised to ignore market friction when leveraging to achieve target higher returns. Not only risk-adjusted returns significantly deteriorate, but also those losses become steeper when setting higher targets requiring increased levels of leverage. Moreover, leverage-constrained and less risk-averse investors ignoring liquidity costs ex ante face the most losses in expected utility ex post.

The Choice of the Optimal Variant of the Mine Liquidation due to the Possibility of Obtaining Methane from Goafs

The publication analyses the possibility of reducing the costs of mine liquidation in terms of obtaining methane from goafs. Obtaining methane from goafs can bring financial, ecological and social benefits for many years. In areas where mining activity is reduced, any potential way to restore workplaces should be considered. The possible variants of technical solutions were presented and the conclusions resulting from each variant were indicated. Optimal variants were selected from the proposed liquidation variants by means of single-criterion and multi-criteria analysis. The analysis showed the main factors influencing the course of the mine liquidation and methane drainage process.

LIQUIDITY CAPACITY AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA

This study determined the effect of liquidity capacity on the financial performance of commercial banks in Kenya. Specific the study determined the effect of Net Stable Funding, Liquidity Coverage, Liquidity Gap and Provisioning for Non-Performing Loans on the financial performance of banks in Kenya. Bank competition variable was used to determine the moderating effect on the relationship between liquidity capacity and the financial performance of commercial banks in Kenya. The study was anchored on the positivism philosophy. The study used an explanatory research design. The study applied panel data models (random effects) based on the outcome of Hausman specification tests to determine the effect of liquidity capacity on the financial performance of commercial banks in Kenya. To test the moderating effect of bank competition variable on the relationship between liquidity capacity and the financial performance of commercial banks in Kenya, Keppel and Zedeck (1989) two-step procedure was used. The regression results revealed that Net Stable Funding and Liquidity Coverage have a significant positive effect on financial performance of commercial banks in Kenya. Provisioning for Non-Performing Loans Liquidity Gap and Provisioning for Non-Performing Loans had a significant negative effect on financial performance of commercial banks in Kenya. The study established that bank competition had a significant moderating effect on the relationship between liquidity capacity and the financial performance of commercial banks in Kenya. Based on these findings, the study recommends that commercial banks in Kenya need to have a good appreciation in terms of having full visibility of all cash flows on the positions of exposures across their operations. Further, they need to have a good insight in terms of the assumptions that drive the cash flows both from a liquidity point of view and from the valuation perspective to best address the terms of requirement from the regulatory standpoint. Additionally, they should empress the stress testing element into the overall equation of their operational activities as prescribed in the Basel III accords. Finally, the study recommends that all commercial banks in Kenya should incorporate liquidity costs, benefits, and risks in the performance measurement, pricing, and approval process for all significant business activities to ensure that the performance of commercial banks in Kenya is enhanced. This research was unable to identify all the possible variables with explanation power on commercial banks’ financial performance in Kenya. Hence, this formed a basis for further research.

How does liberalization affect emerging stock markets? Theories and empirical evidence

AbstractThis paper reviews the literature that discusses how liberalization affects emerging stock markets on the cost of equity, stock volatility, stock liquidity, and informational efficiency. The survey consists of two parts, theoretical arguments and empirical evidence. Four primary mechanisms explaining the impacts are risk diversification, information‐sharing, friction channel, and market competition. Our survey indicates that liberalization was evidenced to reduce the cost of equity (via risk diversification mechanism), stabilize stock volatility (mainly through risk diversification mechanism), increase stock market liquidity (in both friction channels and informational‐sharing mechanisms), and improve the local market's informational efficiency (by informational‐sharing mechanism). Also, we suggest some aspects of theoretical arguments that still need further examination by empirical research.

Who pays the liquidity cost? Central bank announcements and adverse selection

AbstractThis study examines whether the composition of market participants contributes to shaping market liquidity around central bank announcements. By analyzing transaction‐level data from a stock index futures market, we find that the roles of foreign and domestic institutional investors in taking or providing liquidity, respectively, are switched following the news announcements. The participation of domestic (foreign) institutions is negatively (positively) associated with liquidity provision shortly after the announcements, whereas they provide (consume) liquidity in general. The change in domestic institutions' roles is attributed to their advantages in processing local news as it is pronounced when they actively participate. Domestic individuals remain largely noisy and unresponsive. Overall, the results support the existence of adverse selection costs in the order‐driven context and imply that institutional investors may trade with the wind when they have information superiority.

Holding Horizon: A New Measure of Active Investment Management

Abstract This article introduces a new holding horizon measure of active management and examines its relation to future risk-adjusted fund performance (alpha). Our measure reveals a wide cross-sectional dispersion in mutual fund investment horizons, and shows that long-horizon funds exhibit positive future long-term alphas by holding stocks with superior long-term fundamentals. Further, stocks largely held by long-horizon funds outperform stocks largely held by short-horizon funds by more than $ 3\% $ annually, adjusted for risk, over the following 5-year period. We also find a clientele effect: to reduce liquidity costs, long-horizon funds attract more long-term investors through share classes that carry load fees.

Debt-Maturity Management with Liquidity Costs

Next article FreeDebt-Maturity Management with Liquidity CostsSaki Bigio, Galo Nuño, and Juan PassadoreSaki Bigio Search for more articles by this author , Galo Nuño Search for more articles by this author , and Juan Passadore Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Just Accepted Article DOIhttps://doi.org/10.1086/723392 Views: 59Total views on this site HistoryAccepted November 07, 2022 PDF download Crossref reports no articles citing this article.

Swing Pricing: Theory and Evidence

Open-end mutual funds offer investors same-day liquidity while holding assets that in some cases take several days to sell. This liquidity transformation creates a potentially destabilizing first-mover advantage: When asset prices fall, investors who exit a fund earlier may pass the liquidation costs generated by their share redemptions to investors who remain in the fund. This incentive becomes particularly acute in periods of market stress, and it can amplify fire-sale spillover losses to other market participants. Swing pricing is a liquidity management tool that targets this first-mover advantage. It allows a fund to adjust or “swing” its net asset value in response to large flows out of or into a mutual fund. This article discusses the industry and regulatory context for swing pricing, and it reviews theory and empirical evidence on the design and effectiveness of swing pricing. The article concludes with directions for further research.

Does managerial ability and auditor report readability affect corporate liquidity and cost of debt?

PurposeThis study investigates the impact of managerial ability and auditor report readability on the cost of debt and corporate liquidity in Omani-listed industrial companies.Design/methodology/approachThe study uses data from the S&P Capital IQ database and audited annual reports published on Muscat Securities Market. The sample consists of 35 firms (175 firm-year observations) from 2015 to 2019. Managerial ability is measured using the data envelopment analysis proposed by Demerjian et al. (2012a, b). Auditor report readability is measured as a log of the auditor report digital file size proposed by Loughran and McDonald (2014).FindingsThis study finds that a company's managerial ability reduces the cost of debt lending support to upper echelons and agency theory. Highly able managers of industrial companies are associated with increased corporate liquidity consistent with the precautionary motive of holding cash. In addition, less-readable auditor reports contribute to higher debt costs and reduce corporate liquidity.Originality/valueTo the best of the authors’ knowledge, few studies have explored the influence of managerial ability and auditor reporting readability on firms' financial policy. For industrial-sector firms, this study demonstrates the managerial ability and readability of auditor readability as significant determinants of the cost of debt and corporate liquidity, especially during periods of uncertainty. Thus, the findings can be generalized to other non-financial sector firms in the country and the Middle East.

Cash flow volatility and debt maturity structure: Evidence from the Gulf Cooperation Council countries

This study aims to investigate the impact of cash flow volatility on the debt maturity structure choices of corporations in the Gulf Cooperation Council (GCC) countries, a region with large gross domestic products (GDPs), negligible corporate taxes, and bank-based economies. The study uses a four-year rolling standard deviation of cash flows as a proxy for volatility and examines its impact on the use of long-term debt by applying the two-stage least square estimator. In addition, the study constructs a categorical debt maturity variable and applies the ordered probit regression to analyze the impact of volatility on the probability of having long-term debt. The findings of this study show that both the proportion of long-term debt relative to total debt and the probability of having long-term debt decrease significantly with volatility. These findings suggest that volatility limits GCC firms’ use of long-term borrowing which has implications for their private investments. Other findings indicate that firm size, asset tangibility, asset maturity, and leverage have a positive impact on debt maturity while growth opportunities have a negative impact, which suggests that GCC firms use short-term debt to reduce agency and liquidity costs.

Total cost of ownership of fuel cell (FCEV) and electric (EV) buses in delivery of public transportation services on the example of Upper-Silesian and Zaglebie Metropolis

Purpose: The purpose of the article is to determine and compare Total Cost of Ownership (TCO) metrics of buses operating in public transportation system depending on their powertrain. TCO is widely used method supporting decision making in purchases, taking into account all operational and extraordinary costs of delivery, operations, maintenance and liquidation of an asset in its lifecycle. It will provide answer to the question of sustainability of the business in the time horizon reflecting economic life on an asset, in this case – the vehicle. Design/methodology/approach: Main methods used in the paper are critical literature review concerning TCO models and its application for rolling stock, case study research conducted in the Upper Silesian and Zagłębie Metropolis aimed at collection of financial data. Gathered figures were used to develop comparative calculations of TCO for electric (EV) and fuel cell (FCEV) buses. Findings: In course of the research and analyses it was confirmed that the Total Cost of Ownership of the EV is significantly lower, comparing to FCEV, and only political decisions and significant public support of investments in FCEV buses may equalize TCO values for both types of powertrain. Sensitivity of TCO calculated against fuel and electricity prices is very low, and such depreciation of hydrogen fuel is very unlikely to take place. Research limitations/implications: Data gathered for EVs are real life, as carriers have long term experience in their use, whereas the data for FCEVs comes primarily from test drives and road tests carried out by the suppliers and carriers. Practical implications: Development of hydrogen technology still requires massive public financial support, otherwise the costs of bus operations with this type of powertrain is uncompetitive comparing to battery (EV) powertrain. Decarbonisation of the economy is then highly dependent on political priorities, since the businesses may not demonstrate sufficient interest in participation in this process, primarily due to higher costs and lack of attractive incentives. Originality/value: Originality of this approach results from rather infrequent use of this method, comparing to other, i.e. NPV. Use of TCO may facilitate decision making process as it does not require differential approach, comparing to NPV, however, for comparing different possible choices, such comparison of values may be also applied. Keywords: total cost of ownership, economic performance, public transportation, FCEV, EV. Category of the paper: conceptual paper, case study.

The Impact of Securitization on Bank Efficiency and the Mediating Role of Cost of Funding and Liquidity

The Impact of Securitization on Bank Efficiency and the Mediating Role of Cost of Funding and Liquidity

Determinants of Debt Financing: An Empirical Analysis of Non-Financial Listed Companies in Sri Lanka

The purpose of this study is to identify the factors which determine the level of debt financing over the equity financing of the non-financial companies in Sri Lanka. The study is conducted on a sample of 30 companies from non-finance companies listed on the Colombo Stock Exchange (CSE). The sample consists of 20 companies that are selected based on the highest market capitalization and 10 companies which have issued debentures in the market. The data are obtained from the annual reports of sample companies for the years 2015 to 2018 for this purpose. A panel data regression analysis is conducted to analyze whether the firm performance, age, size, agency cost of debt, tangibility, sales growth, liquidity, and tax shield have an impact on the debt financing decisions of the firm. The pecking order theory, agency theory, and trade-off theory are used to explain the impact of determinants on debt financing. The findings of the analysis show that the firm performance, size, liquidity, tangibility, sales growth, and agency cost of debt have generated an inverse association with the firm leverage. Age and non-debt tax shield positively correlated with leverage according to the analysis. Findings are in line with the hypotheses developed except for firm size, tangibility, and non-debt tax shield. The size of the firm and tangibility deviate from the hypotheses developed while the non-debt tax shield is found to be insignificant in influencing its decision to apply for financing. This research has provided the basis to explore the determinants of debt financing in the overall capital structure of Sri Lankan firms. The results are useful for the managers and the policymakers to have knowledge about the firm-specific determinants of debt financing, and it should help corporate managers to make optimal capital structure decisions. This study contributes to enhancing the existing literature by analyzing the impact of determinants of debt financing in listed non-financial companies in Sri Lanka.

Corporate social responsibility transparency and trade credit financing

PurposeThis study aims to examine whether a company’s corporate social responsibility (CSR) transparency (reflected in two separate dimensions of social transparency and environmental transparency) affects a company’s dependence on expensive trade credit (TC) financing.Design/methodology/approachThe authors use a panel of S&P 500 index companies between 2012 and 2019 and ordinary least squares estimators. Transparency ratings represented by Bloomberg scores capture both the quantity and quality of verified CSR practice information.FindingsCSR transparency (CSRT) is negatively associated with a firm’s dependence on expensive TC financing. This study’s results continue to hold after a battery of robustness tests like substitute proxies for TC, use of two-stage least squares regression, industry-adjusted dependent variable, generalized linear model and bootstrapping approach. This association is stronger among companies with higher information asymmetry (IASY) and lower quality regarding governance and financial reporting. Further investigation indicates that potential channels through which CSRT mitigates a company’s reliance on TC financing are the cost of debt (CoD) and stock liquidity. This study’s findings suggest that transparent companies have a lower CoD and higher stock liquidity. This helps these companies to be more financially flexible and eventually less dependent on expensive TC financing.Originality/valueBy combining two separate research lines of TC and CSR, this study adds to both works of literature as it is the first (to the best of the authors’ knowledge) to present evidence of the effect of CSRT proxied by Bloomberg scores on a company’s reliance on TC (a real economic decision and financial policy). Additionally, this study documents the moderating effects of financial reporting quality, IASY and corporate governance on the relationship between CSRT and TC financing. In conclusion, this study provides empirical evidence regarding the potential mechanisms of CoD and stock liquidity, through which CSRT influences a company’s reliance on TC financing.

Pengaruh Ukuran Perusahaan, Variabilitas Harga Pokok Penjualan, Likuiditas, dan Laba Sebelum Pajak Terhadap Pemilihan Metode Akuntansi Persediaan:

This study aims to examine the size of company, the variability of cost of goods sold, liquidity, and profit before tax on the selection of inventory accounting methods. To test the hypothesis used secondary data with a purposive sampling method. Data analysis technique used multiple linier regression analysis with company size, variability of the cost of inventory, liquidity, and profit before tax as variable (X) and the selection of inventory accounting methods as variable (Y). After data was analyzed, it was determined that partially the variability of cost of goods sold and liquidity had an effect on the selection of inventory accounting methods, while firm size and profit before tax had no effect on inventory accounting methods. Simultaneously the size of the company, the variability of cost of goods sold, liquidity and profit before tax together have a significant effect on the selection of inventory accounting methods.
 Keywords : firm size, variability of cost of goods sold, liquidity, profit before tax, selection of inventory accounting methods.