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The Liquidity Coverage Ratio and Security Prices


Fuhrer, Lucas; Müller, Benjamin; Steiner, Luzian (2017). The Liquidity Coverage Ratio and Security Prices. Journal of Banking and Finance, 75:292-311.

Abstract

What is the added value of a security which qualifies as a “high-quality liquid asset” (HQLA) under the Basel III “Liquidity Coverage Ratio” (LCR)? In this paper, we quantify the added value in terms of yield changes and, as suggested by Stein (2013), call it “HQLA premium”. To do so, we exploit the introduction of the LCR in Switzerland as a unique quasi-natural experiment and we find evidence for the existence of an HQLA premium in the order of 4 basis points. Guided by theoretical considerations, we claim that the HQLA premium is state dependent and argue that our estimate is a lower bound measure. Furthermore, we discuss the implications of an economically significant HQLA premium. Thereby, we contribute to a better understanding of the LCR and its implications for financial markets.

Abstract

What is the added value of a security which qualifies as a “high-quality liquid asset” (HQLA) under the Basel III “Liquidity Coverage Ratio” (LCR)? In this paper, we quantify the added value in terms of yield changes and, as suggested by Stein (2013), call it “HQLA premium”. To do so, we exploit the introduction of the LCR in Switzerland as a unique quasi-natural experiment and we find evidence for the existence of an HQLA premium in the order of 4 basis points. Guided by theoretical considerations, we claim that the HQLA premium is state dependent and argue that our estimate is a lower bound measure. Furthermore, we discuss the implications of an economically significant HQLA premium. Thereby, we contribute to a better understanding of the LCR and its implications for financial markets.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:February 2017
Deposited On:22 Nov 2017 14:20
Last Modified:09 Dec 2017 03:40
Publisher:Elsevier
ISSN:0378-4266
Additional Information:Basel III, Liquidity Coverage Ratio, High-quality liquid assets, HQLA premium
Publisher DOI:https://doi.org/10.1016/j.jbankfin.2016.11.018
Related URLs:http://www.sciencedirect.com/science/article/pii/S0378426616302242 (Publisher)
Other Identification Number:merlin-id:14534

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