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Transmission of Liquidity Shocks

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  • 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.
  3. Heiko Hesse & Nathaniel Frank & Brenda González-Hermosillo, 2008. "Transmission of Liquidity Shocks," IMF Working Papers 08/200, International Monetary Fund.
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