IMF paper estimates social costs imposed by systemic liquidity risk

IMF headquarters in Washington DC

A working paper, published by the International Monetary Fund (IMF) in July, constructs a systemic liquidity risk index, finding a link between the level of the index and equity volatility. This can in turn be used to calculate the social cost of liquidity support to the financial sector, according to the research.

The author, Tiago Severo, develops the index based on arbitrage relationships of various asset classes from 2004–2011, before testing the equity returns of 53 global banks when

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