In Search of Liquidity Risk in Bank Stock Returns

54 Pages Posted: 2 Feb 2017 Last revised: 26 Mar 2020

See all articles by Yasser Boualam

Yasser Boualam

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Anna Cororaton

Southern Methodist University (SMU) - Finance Department

Date Written: May 29, 2019

Abstract

We document that higher measures of liquidity risk on banks balance sheets are associated with lower expected stock returns. We first calculate a measure of liquidity risk, referred to as the liquidity gap (LG), which reflects how much of a bank's volatile liabilities are covered by its stock of liquid assets. We show that the standard factor models -- even when augmented with bond risk, market liquidity, and financial-size factors -- do not fully explain the cross section of bank stock returns sorted according to this measure. A portfolio that is long in low liquidity risk banks and short in high liquidity risk banks delivers a statistically significant alpha of 6 percent annually. This effect is not driven by bank characteristics such as size, profitability, or risk measures related to leverage or asset quality, but appears to be partly due to the degree of complexity of banking organizations and potential valuation errors pre-crisis.

Keywords: Financial Intermediation, Banking, Liquidity mismatch, Bank Runs, Asset Pricing

JEL Classification: D86, E02, E22, G01, G21, G28, L26

Suggested Citation

Boualam, Yasser and Cororaton, Anna, In Search of Liquidity Risk in Bank Stock Returns (May 29, 2019). Proceedings of the 4th Chapman Conference on Money & Finance on Liquidity: Pricing, Management and Financial Stability, Kenan Institute of Private Enterprise Research Paper No. 20-06, Available at SSRN: https://ssrn.com/abstract=2909376 or http://dx.doi.org/10.2139/ssrn.2909376

Yasser Boualam (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://www.yasserboualam.com

Anna Cororaton

Southern Methodist University (SMU) - Finance Department ( email )

United States

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