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Dynamic balance sheet model with liquidity risk

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  • Hałaj, Grzegorz

Abstract

Theoretically optimal responses of banks to various liquidity and solvency shocks are modelled. The proposed framework is based on a risk-adjusted return portfolio choice in multiple periods subject to the default risk related either to liquidity or solvency problems. Performance of the model and sensitivity of optimal balance sheet structures to some key parameters of the model are illustrated in a specific calibrated setup. The results of the simulations shed light on the effectiveness of the liquidity and solvency regulation. The flexible implementation of the model and its semi-analytical solvability allows for various easy applications of the framework for the macro-prudential policy analysis. JEL Classification: G21, C61, G11

Suggested Citation

  • Hałaj, Grzegorz, 2016. "Dynamic balance sheet model with liquidity risk," Working Paper Series 1896, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20161896
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1896.en.pdf
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    Cited by:

    1. Jane E. Ihrig & Edward Kim & Cindy M. Vojtech & Gretchen C. Weinbach, 2019. "How Have Banks Been Managing the Composition of High-Quality Liquid Assets?," Review, Federal Reserve Bank of St. Louis, vol. 101(3).
    2. Hałaj, Grzegorz, 2018. "Agent-based model of system-wide implications of funding risk," Working Paper Series 2121, European Central Bank.
    3. Grzegorz Halaj & Sofia Priazhkina, 2021. "Stressed but not Helpless: Strategic Behaviour of Banks Under Adverse Market Conditions," Staff Working Papers 21-35, Bank of Canada.
    4. Calimani, Susanna & Hałaj, Grzegorz & Żochowski, Dawid, 2022. "Simulating fire sales in a system of banks and asset managers," Journal of Banking & Finance, Elsevier, vol. 138(C).
    5. Júdice, Pedro & Zhu, Qiji Jim, 2021. "Bank balance sheet risk allocation," Journal of Banking & Finance, Elsevier, vol. 133(C).

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    More about this item

    Keywords

    asset structure; banking; optimal portfolio;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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