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Transmission of Liquidity Shocks

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Author Info

  • Heiko Hesse
  • Nathaniel Frank
  • Brenda González-Hermosillo

Abstract

We examine the linkages between market and funding liquidity pressures, as well as their interaction with solvency issues surrounding key financial institutions during the 2007 subprime crisis. A multivariate GARCH model is estimated in order to test for the transmission of liquidity shocks across U.S. financial markets. It is found that the interaction between market and funding illiquidity increases sharply during the recent period of financial turbulence, and that bank solvency becomes important.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/200.

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Length: 21
Date of creation: 01 Aug 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/200

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Related research

Keywords: Liquidity management; External shocks; Spillovers; Credit; Banks; Financial institutions; Economic models; correlations; financial markets; correlation; bond; financial stability; stock market; treasury bond; hedge; hedge funds; financial market; money markets; money market; bond spread; covariance; stock markets; treasury bonds; bonds; statistics; heteroscedasticity; bootstrap; dummy variable; bond returns; financial innovation; confidence intervals; financial intermediation; standard deviations; samples; equations; explanatory power; monte carlo simulations; monte carlo methods; international money markets; financial contagion; equation; sampling; diagonal matrix; stock market volatility; econometrics; bond markets; financial system; covariances; bond market; surveys; treasury bond yields; equity markets; bond yields;

References

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  1. Lorenzo Cappiello & Robert F. Engle & Kevin Sheppard, 2006. "Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(4), pages 537-572.
  2. Paul S. Mills & John Kiff, 2007. "Money for Nothing and Checks for Free," IMF Working Papers 07/188, International Monetary Fund.
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Citations

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Cited by:
  1. Rainer Masera, 2011. "Taking the moral hazard out of banking: the next fundamental step in financial reform," PSL Quarterly Review, Economia civile, vol. 64(257), pages 105-142.
  2. Sanae Ohno, 2013. "European Sovereign Risk: The Knock-on Effects of Default Risk across the Public and Financial Sectors," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 9(1), pages 139-170, January.
  3. Dufrénot, Gilles & Mignon, Valérie & Péguin-Feissolle, Anne, 2011. "The effects of the subprime crisis on the Latin American financial markets: An empirical assessment," Economic Modelling, Elsevier, vol. 28(5), pages 2342-2357, September.
  4. Paolo Angelini & Andrea Nobili & Maria Cristina Picillo, 2009. "The interbank market after August 2007: what has changed, and why?," Temi di discussione (Economic working papers) 731, Bank of Italy, Economic Research and International Relations Area.
  5. Nathaniel Frank & Heiko Hesse, 2009. "Financial Spillovers to Emerging Markets during the Global Financial Crisis," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(6), pages 507-521, December.
  6. Aurelia Ioana Logojan, 2009. "The Greatest Financial Crises And The Economic Theories," Romanian Economic Business Review, Romanian-American University, vol. 4(3), pages 7-16, September.
  7. Laurence Fung & Ip-wing Yu, 2009. "A Study on the Transmission of Money Market Tensions in EMEAP Economies During the Credit Crisis of 2007 - 2008," Working Papers 0909, Hong Kong Monetary Authority.
  8. Irfan Akbar Kazi & Suzanne Salloy, 2013. "Contagion effect due to Lehman Brothers’ bankruptcy and the global financial crisis - From the perspective of the Credit Default Swaps’ G14 dealers," EconomiX Working Papers 2013-6, University of Paris West - Nanterre la Défense, EconomiX.
  9. Tao Sun & L. Effie Psalida, 2009. "Spillovers to Emerging Equity Markets," IMF Working Papers 09/111, International Monetary Fund.
  10. Heiko Hesse & Nathaniel Frank, 2009. "The Effectiveness of Central Bank Interventions During the First Phase of the Subprime Crisis," IMF Working Papers 09/206, International Monetary Fund.
  11. Adalbert Winkler, 2010. "The Financial Crisis: A Wake-Up Call for Strengthening Regional Monitoring of Financial Markets and Regional Coordination of Financial Sector Policies?," Working Papers id:3021, eSocialSciences.
  12. Guyot, Alexis & Lagoarde-Segot, Thomas & Neaime, Simon, 2014. "Foreign shocks and international cost of equity destabilization. Evidence from the MENA region," Emerging Markets Review, Elsevier, vol. 18(C), pages 101-122.
  13. Cheong, Siew Ann & Fornia, Robert Paulo & Lee, Gladys Hui Ting & Kok, Jun Liang & Yim, Woei Shyr & Xu, Danny Yuan & Zhang, Yiting, 2011. "The Japanese economy in crises: A time series segmentation study," Economics Discussion Papers 2011-24, Kiel Institute for the World Economy.
  14. Nathaniel Frank, 2009. "Linkages between asset classes during the financial crisis, accounting for market microstructure noise and non-synchronous trading," Economics Papers 2009-W04, Economics Group, Nuffield College, University of Oxford.
  15. Stefano Fenoaltea, 2010. "The reconstruction of historical national accounts: the case of Italy," PSL Quarterly Review, Economia civile, vol. 63(252), pages 77-96.
  16. Adam Geršl & Zlatuše Komárková, 2009. "Liquidity Risk and Banks’ Bidding Behavior: Evidence from the Global Financial Crisis," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(6), pages 577-592, December.
  17. Brenda González-Hermosillo & Heiko Hesse, 2009. "Global Market Conditions and Systemic Risk," IMF Working Papers 09/230, International Monetary Fund.
  18. Nabi, Mahmoud Sami, 2012. "Dual Banking and Financial Contagion," MPRA Paper 49814, University Library of Munich, Germany.
  19. Irfan Akbar Kazi & Suzanne Salloy, 2014. "Dynamics in the correlations of the Credit Default Swaps’ G14 dealers: Are there any contagion effects due to Lehman Brothers’ bankruptcy and the global financial crisis?," Working Papers 2014-237, Department of Research, Ipag Business School.

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