Pricing The Commercial Bank's Liquidity: Some Options

This dissertation is not only a succession but an extension of Keynes's Liquidity Preference Theory.It explores the value of the liquidity of the commercial bank from the perspective of option,and thus finds a value of embedded liquidity option except the yield of interest.It is considered that flexibility is the essence of the liquidity of the commercial bank.This dissertation carries on research on two aspects:(1) assets with high liquidity can meet the liquidity need for the depositor and so the bank will not undergo bankruptcy,i.e.high liquidity assets can insure the bank against bankrupt risk.(2) When the bank holds liquidity assets,it can catch the opportunity in the future to earn more yields.These yields result from the speculative motive.So it is believed that the bank's holding liquidity assets can also earn yield,and correspondingly such yield is divided into two different parts,which is the new idea of this dissertation theoretically: (1) When the bank holds enough liquidity,it can withdraw from the market or keep in business,on the contrary,if not and without a last lender of resort and deposit insurance system simultaneously,what the bank can do is only to go bankrupt.So obviously holding liquidity provides an option for the shareholders of the bank,and such option is valuable.But its value was not referred in Keynes's Liquidity Preference Theory.(2) When the bank holds liquidity assets,it can catch the opportunity in the future to earn more yields.These yields result from the speculative motive.Holding liquidity assets provides the bank with an option for investing in the future,but if not i.e.the bank lacks in liquidity assets,it can not catch the opportunity to earn more yields conveniently and even lose it.Consequently,such an option for investing in the future is valuable.The bank's incentives of insurance and investment of holding liquidity assets and the relationship between the flexibility and option are also considered in this dissertation.Then based on the bank's incentive and the flexibility of holding liquidity assets,the characteristics of both the liquidity option for insurance and liquidity option for investment are argued and these two option can combined with Three-Assets Miller-Orr Model used as a tool of combination.Thereby three models have been set up which are the commercial bank's liquidity option for insurance pricing model,the commercial bank's liquidity option for investment pricing model and the commercial bank's liquidity option pricing model.Moreover some empirical evidence is provided,and the results of it are reasonable and meaningful for policies in a certain degree.Tools such as option pricing modal, GARCH,Maximum Likelihood Method,Solver program of Microsoft's Excel and Multi-Variable Linear Trend Model are used with option pricing model being the main tool.So the applications of the option tools are widen in this dissertation.Some figures and tables are also used.