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The dynamics and determinants of liquidity connectedness across financial asset markets

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  • Liew, Ping-Xin
  • Lim, Kian-Ping
  • Goh, Kim-Leng

Abstract

We quantify the degree of liquidity connectedness across stock, bond, money and foreign exchange markets in Malaysia. The liquidity connectedness index from the time-varying parameter vector autoregression model reveals sensitivity to extreme market events but low cross-asset liquidity contagion on average, implying negligible risk of a systemic liquidity dry-up in the Malaysian financial markets. Further analysis finds that cross-asset liquidity connectedness is explained by global market uncertainty, perceived credit risk as well as international crude oil prices. The influence of external factors underscores the needs for small open economy like Malaysia to expand market surveillance to monitor cross-border liquidity shocks.

Suggested Citation

  • Liew, Ping-Xin & Lim, Kian-Ping & Goh, Kim-Leng, 2022. "The dynamics and determinants of liquidity connectedness across financial asset markets," International Review of Economics & Finance, Elsevier, vol. 77(C), pages 341-358.
    • Handle: RePEc:eee:reveco:v:77:y:2022:i:c:p:341-358
    DOI: 10.1016/j.iref.2021.10.003
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    Cited by:

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    2. Pham, Son Duy & Nguyen, Thao Thac Thanh & Do, Hung Xuan, 2023. "Natural gas and the utility sector nexus in the U.S.: Quantile connectedness and portfolio implications," Energy Economics, Elsevier, vol. 120(C).
    3. Pan, Beier, 2023. "The asymmetric dynamics of stock–bond liquidity correlation in China: The role of macro-financial determinants," Economic Modelling, Elsevier, vol. 124(C).

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    More about this item

    Keywords

    Liquidity connectedness; Liquidity spillovers; Time-varying parameter VAR; Financial markets; Malaysia;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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