Research On The Theory Of Liquidity Management In The Interbank Market Based On Search Cos

As the carrier of Chinese money,bond and currency market,the interbank market plays an important role in completing the transmission of monetary and fiscal policies and effectively serving the real economy.From the perspective of market participants,the interbank market has two functions: bond investment and liquidity risk management.In order to deepen the understanding of interbank market and provide a theoretical basis for practitioners and regulators to analyze this market,this paper uses the research paradigm of OTC market search and matching and combines the typical characteristics of Chinese market.This paper makes a theoretical analysis and extended research on how investors manage liquidity in the interbank market from the perspectives of individual heterogeneity of investors,aggregate risks faced by all investors and a more general contract market.The contribution of this paper includes the following aspects:(1)First of all,from the perspective of theoretical model,most scholars discuss the results when the model is in a steady state,that is,from a macro perspective,when the distribution of investors does not change,investors’ optimal trading behavior and market structure.Based on the benchmark model including heterogeneous investors,from the perspective of investor distribution and corresponding market statistics(such as average asset holdings,etc.),this paper describes the dynamic process of how market investors manage excess or insufficient liquidity through trading and transfer to market stability when investors are in non-stable state.Practitioners,especially policy researchers,need to consider how the market evolves after the occurrence of policy shocks or exogenous shocks.This paper provides analytical methods and thinking benchmarks for such problems.(2)Secondly,from the perspective of individual investors,this paper introduces the heterogeneity of investors’ asset holding capacity,which can also be understood as the heterogeneity of risk aversion,and discusses the difference of investors’ liquidity management behavior and the feature of the market.For the domestic inter-bank market,the market investors themselves are very different.On the one hand,the balance sheet size of various institutions is quite different,so the ability of liquidity risk bearing is different,and the ability to hold assets will be reflected in the investment behavior accordingly.On the other hand,after the new regulations on asset management,many products are managed with net worth,and amortized cost method is not allowed to be used for valuation.However,deposit-taking financial institutions can still use amortized cost method when buying bonds,and value them according to the assets they hold to maturity.Differences in valuation methods among institutions also lead to differences in their risk aversion to assets.Therefore,it is meaningful to discuss the heterogeneity of risk aversion/asset holding ability among institutions to better understand the decision-making behavior of market investors.It is found that investors with strong asset holding ability are subjected to greater search friction,slower utility improvement after matching,and greater impact of search cost on their liquidity management.(3)Thirdly,from the perspective of investors as a whole,this paper discusses the changes of investor behavior when there is an aggregate shock.What is discussed in this paper is a technical matching efficiency shock.This volatility/shock affects the ease of liquidity management for all investors in the market at the same time.This paper discusses how investors’ liquidity management behavior changes when they can anticipate such a general shock in the market.The study found that when investors can expect a change in matching efficiency,they tend to be more aggressive and more conservative if they can expect a change for the better,i.e.a reduction in search costs.In OTC markets,such shocks,which cause investors to make additional trades without fundamental changes(asset valuations),can be understood as the source of changes in the overall market liquidity premium,and to some extent,changes in the overall market matching efficiency can be understood as a proxy variable of market sentiment.(4)Finally,this paper extends the bond market to a more general contract market,and discusses the mechanism of contract expiration in the money market and derivatives market.When discussing the OTC market in most literatures,the assets depicted are bonds that will not expire in a short time.However,for the money and derivative markets,the funds lending contracts and derivative contracts will expire,that is,the assets will not be transferred permanently.Therefore,this paper introduces random maturing debt to describe contract maturity,so as to directly analyze investors’ trading liquidity(funds)behavior.It is found that the essence of the liquidity stratification discussed in the domestic market lies in the misallocation of resources(funds)in the money market.As long as the contracts expire,funds will always be returned to investors who have a capital advantage,and the cost of searching in the OTC market increases stratification,making investor liquidity management more difficult.The excessively long transmission chain of central bank supply discussed in domestic literature is only one form of liquidity stratification.