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We provide the first systematic study of liquidity in the foreign exchange market. We find significant variation in liquidity across exchange rates, substantial illiquidity costs, and strong commonality in liquidity across currencies and with equity and bond markets. Analyzing the impact of liquidity risk on carry trades, we show that funding (investment) currencies offer insurance against (exposure to) liquidity risk. A liquidity risk factor has a strong impact on carry trade returns from 2007 to 2009, suggesting that liquidity risk is priced. We present evidence that liquidity spirals may trigger these findings.

Banks can create liquidity for firms by pooling their idiosyncratic risks. As a result, bank lines of credit to firms with greater aggregate risk should be costlier and such firms opt for cash in spite of the incurred liquidity premium. We find empirical support for this novel theoretical insight. Firms with higher beta have a higher ratio of cash to credit lines and face greater costs on their lines. In times of heightened aggregate volatility, banks exposed to undrawn credit lines become riskier; bank credit lines feature fewer initiations, higher spreads, and shorter maturity; and, firms' cash reserves rise.

We find consistent value and momentum return premia across eight diverse markets and asset classes, and a strong common factor structure among their returns. Value and momentum returns correlate more strongly across asset classes than passive exposures to the asset classes, but value and momentum are negatively correlated with each other, both within and across asset classes. Our results indicate the presence of common global risks that we characterize with a three-factor model. Global funding liquidity risk is a partial source of these patterns, which are identifiable only when examining value and momentum jointly across markets. Our findings present a challenge to existing behavioral, institutional, and rational asset pricing theories that largely focus on U.S. equities.

This work explores risk culture in banks following the financial crisis. It analyses the role of national and institutional risk culture, market competitiveness, organisational systems and institutional practices that led to a weakening of risk culture in financial institutions leading up to the financial crisis.

Defining contagion as correlation over and above that expected from economic fundamentals, we find strong evidence of worst return contagion across hedge fund styles for 1990 to 2008. Large adverse shocks to asset and hedge fund liquidity strongly increase the probability of contagion. Specifically, large adverse shocks to credit spreads, the TED spread, prime broker and bank stock prices, stock market liquidity, and hedge fund flows are associated with a significant increase in the probability of hedge fund contagion. While shocks to liquidity are important determinants of performance, these shocks are not captured by commonly used models of hedge fund returns.

While financial institutions grapple with mounting climate risks, their impact reverberates differently across the multifaceted dimensions of bank liquidity. Using a panel dataset of 166 countries (1999–2021) and employing two-stage instrumental variable least squares with Driscoll-Kraay standard errors, we examine how climate risk affects asset, funding, market, and systematic liquidity. Drawing upon precautionary liquidity hoarding and flight-to-safety theory, we find that climate risk adversely affects all liquidity dimensions except asset liquidity, as investors seek safer assets during environmental uncertainty. Our subsample analysis reveals that institutional characteristics significantly influence these effects: large and profitable banks benefit from flight-to-safety in funding liquidity despite systemic vulnerabilities, while smaller banks face heightened market and asset liquidity risks due to resource constraints. The impact varies across economic development levels, with low-income countries experiencing more severe systematic and funding liquidity challenges, while high-income countries show greater market liquidity vulnerability. This study advances the literature by providing the first comprehensive multi-dimensional analysis of climate risk-liquidity relationships, offering a nuanced theoretical framework that reconciles conflicting predictions across different liquidity types. Practically and policy-wise, our findings inform size-specific risk management strategies for financial institutions and underscore the necessity for differentiated regulatory approaches, including country-specific capital requirements and climate-adjusted stress testing that reflects heterogeneous impacts across bank sizes and economic development levels. JEL Classification : Q54, G21, C23 Effect of Climate Risk on Various Dimensions of Liquidity Climate risk impacts bank liquidity differently across various dimensions. Our study shows that when climate risk increases, investors seek safer assets, affecting most liquidity types except asset liquidity. Bank characteristics matter: large, profitable banks actually gain funding liquidity during environmental uncertainty, while smaller banks face increased market and asset liquidity risks due to limited resources. Economic development also plays a role - low-income countries experience worse systematic and funding liquidity problems, while high-income countries see greater market liquidity vulnerability. These findings suggest that regulators need tailored approaches to address climate-related banking challenges rather than one-size-fits-all solutions.