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A Study on the Transmission of Money Market Tensions in EMEAP Economies During the Credit Crisis of 2007 - 2008

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  • Laurence Fung

    (Research Department, Hong Kong Monetary Authority)

  • Ip-wing Yu

    (Research Department, Hong Kong Monetary Authority)

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    Abstract

    The recent tension in the interbank markets following the global financial crisis has raised concerns about the turbulence in interbank markets. This paper utilises two widely used indicators for measuring interbank stress (the interbank rate less the Overnight Index Swap rate and the interbank rate less the yield of government securities) to examine the transmission of interbank tension from the US dollar to nine interbank markets in the EMEAP economies. Using a vector autoregression model, we show that during the credit crisis of 2007 - 2008, the distress in the US dollar money market had a material impact with durations of seven to 13 days on the interbank markets for the Hong Kong dollar, Japanese yen, Australian dollar and New Zealand dollar. Moreover, based on a bivariate regime switching ARCH model, we also find evidence of volatility co-movement between the interbank stress indicator of the US dollar and that of the Hong Kong dollar, Japanese yen, Australian dollar, New Zealand dollar, Korean won and Singapore dollar during the crisis. The expected duration when two money markets are both in a high-volatility state is estimated to be as long as seven days. The short-lived impact on the EMEAP economies from a shock in the US dollar money market can be attributed to the policy actions taken by central banks and monetary authorities in the region and the coordinated efforts by policy makers worldwide to contain the credit crisis.

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    File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP09_09_full.pdf
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    Bibliographic Info

    Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 0909.

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    Length: 26 pages
    Date of creation: May 2009
    Date of revision:
    Handle: RePEc:hkg:wpaper:0909

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    Keywords: Interbank stress; Vector autoregression; Regime-switching ARCH;

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    References

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    1. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 12(2-3), pages 231-254.
    2. Heiko Hesse & Nathaniel Frank & Brenda González-Hermosillo, 2008. "Transmission of Liquidity Shocks," IMF Working Papers, International Monetary Fund 08/200, International Monetary Fund.
    3. Edwards, Sebastian & Susmel, Raul, 2001. "Volatility dependence and contagion in emerging equity markets," Journal of Development Economics, Elsevier, Elsevier, vol. 66(2), pages 505-532, December.
    4. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, Elsevier, vol. 64(1-2), pages 307-333.
    5. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, Elsevier, vol. 39(1-2), pages 199-211.
    6. François-Louis Michaud & Christian Upper, 2008. "What drives interbank rates? Evidence from the Libor panel," BIS Quarterly Review, Bank for International Settlements, Bank for International Settlements, March.
    7. Ramchand, Latha & Susmel, Raul, 1998. "Volatility and cross correlation across major stock markets," Journal of Empirical Finance, Elsevier, Elsevier, vol. 5(4), pages 397-416, October.
    8. Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 8(2), pages 225-34, April.
    9. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
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