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SUMMARY:Illiquidty Component of Credit Risk - Morris\, S (Princeton Univer
 sity)
DTSTART:20141218T090000Z
DTEND:20141218T094500Z
UID:TALK56694@talks.cam.ac.uk
CONTACT:Mustapha Amrani
DESCRIPTION:Co-author: Hyun Song Shin (Bank of International Settlements) 
 \n\nWe describe and contrast three different measures of an institution's 
 credit risk. "Insolvency risk" is the conditional probability of default d
 ue to deterioration of asset quality if there is no run by short term cred
 itors. "Total credit risk" is the unconditional probability of default\, e
 ither because of a (short term) creditor run or (long run) asset insolvenc
 y. "Illiquidity risk" is the difference between the two\, i.e.\, the proba
 bility of a default due to a run when the institution would otherwise have
  been solvent. We discuss how the three kinds of risk vary with balance sh
 eet composition. We provide a formula for illiquidity risk and show that i
 t is (i) decreasing in the "liquidity ratio" -- the ratio of realizable ca
 sh on the balance sheet to short term liabilities\; (ii) increasing in the
  "outside option ratio" -- a measure of the opportunity cost of the funds 
 used to roll over short term liabilities\; and (iii) increasing in the "fu
 ndamental risk ratio" -- a measure of ex post variance of the asset portfo
 lio.\n
LOCATION:Seminar Room 1\, Newton Institute
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