Optimal liquidity reserve with funding liquidity risk

Dewei Zhang, Chongfeng Wu and Chunyang Zhou

Applied Economics Letters, 2013, vol. 20, issue 16, 1449-1452

Abstract: In this article, we take the funding liquidity risk into account when determining the optimal liquidity reserve ratio for a commercial bank. A simple continuous-time model is developed, and a discrete-time model is built as a benchmark. We find that compared with the continuous-time model, the discrete-time model would generate a higher reserve ratio when the illiquid project has low haircut rate, and a lower reserve ratio when the project has high haircut rate.

Date: 2013
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DOI: 10.1080/13504851.2013.826860

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