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Contribution Details

Type Master Thesis
Scope Discipline-based scholarship
Title Measuring Banks' Liquidity: An Empirical Comparison of Liquidity Mismatch Index (LMI) and Liquidity Creation Measure (LCM)
Organization Unit
Authors
  • Zeynep Boyali
Supervisors
  • Jean-Charles Rochet
Language
  • English
Institution University of Zurich
Faculty Faculty of Economics, Business Administration and Information Technology
Date May 2015
Abstract Text This thesis is an empirical study of two theoretically-motivated liquidity measures, namely the Liquidity Creation Measure (LCM) proposed by Berger and Bouwman (2009) and the Liquidity Mismatch Index (LMI) proposed by Bai, Krishnamurthy and Weymuller (2015). The performances of the LCM and the LMI are not directly comparable since these liquidity measures are computed using different datasets. Berger and Bouwman (2009) compute the LCM for U.S. commercial banks, while Bai, Krishnamurthy and Weymuller (2015) compute the LMI for U.S. bank holding companies. Therefore, this thesis aims to compute both measures using the same dataset and then perform an empirical comparison of their performances. I compute the LCM and the LMI for all U.S. commercial banks during the sample period of 2003:Q1-2013:Q4 and evaluate the two measures on two dimensions: macro and micro. I show that the LMI performs better than the LCM in both dimensions as it satisfies two important characteristics of a good liquidity measure specified by Bai, Krishnamurthy and Weymuller (2015). From macro-prudential perspectives, the LMI is able to measure liquidity imbalances in the financial system and serve an early warning indicator of financial crises. From micro considerations, the LMI describes liquidity risk in the cross-section of banks and determines banks with higher liquidity risk.
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