- Title
- Illiquidity Component of Credit Risk
- Author(s)
- Stephen Morris Stephen Morris (Princeton University)
- Hyun Song Shin Hyun Shin (Bank for International Settlements; Princeton University)
- Abstract
- We provide a theoretical decomposition of bank credit risk into insolvency risk and illiquidity risk, defining illiquidity risk to be the counterfactual probability of failure due to a run when the bank would have survived in the absence of a run. We show that illiquidity risk is (i) decreasing in the "liquidity ratio"--the ratio of realizable cash on the balance sheet to short-term liabilities; (ii) decreasing in the excess return of debt; and (iii) increasing in the solvency uncertainty--a measure of the variance of the asset portfolio.
- Creation Date
- 2016-05
- Section URL ID
- Paper Number
- 081_2016
- URL
- http://detc.princeton.edu/wp-content/uploads/2016/11/wp081_2016_Morris_Shin_Illiquidity-Component-of-Credit-Risk.pdf
- File Function
- Jel
- G21, G32, G33
- Keyword(s)
- Suppress
- false
- Series
- 10