Year: 2016
Author: Weber, Patrick
Credit and Capital Markets – Kredit und Kapital, Vol. 49 (2016), Iss. 1 : pp. 37–56
Abstract
Mutually reinforcing dynamics between the market liquidity of financial assets and the funding liquidity risks of financial intermediaries were one of the reasons why asset prices declined so significantly with the onset of the financial crisis in 2007. Based on this observation, I show how an excessive rate of funding liquidity risk-taking by financial intermediaries can be used as a timing measure for an upcoming peak of equity market prices in Germany for the time period 1973 to 2010. Funding liquidity risk-taking is thereby defined as the degree of liquidity creation by banks. The working hypothesis is that if banks create liquidity at an excessive rate, then the German equity market will reach a significant peak at or shortly after the peak in the liquidity creation activity of the banking system. The proposed early warning indicator predicted all peaks on the equity market in Germany for the time period 1973 to 2010 with an average lead time of 2.9 months. Hence, the rate of liquidity creation seems to provide very useful information about the future state of financial markets. The early warning indicator can be applied in real-time.
Journal Article Details
Publisher Name: Global Science Press
Language: English
DOI: https://doi.org/10.3790/ccm.49.1.37
Credit and Capital Markets – Kredit und Kapital, Vol. 49 (2016), Iss. 1 : pp. 37–56
Published online: 2016-03
AMS Subject Headings: Duncker & Humblot
Copyright: COPYRIGHT: © Global Science Press
Pages: 20
Keywords: G01 G17 E44 E51 Early warning indicator for distress on financial markets Asset prices Liquidity creation of financial intermediaries Funding liquidity risks
Author Details
| Section Title | Page | Action | Price |
|---|---|---|---|
| Patrick Weber: Excess Liquidity Creation of Banks and Financial Market Peaks | 1 |