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The transmission of liquidity shocks via China's segmented money market: Evidence from recent market events

Author

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  • Lu, Ruoxi
  • Bessler, David A.
  • Leatham, David J.

Abstract

This is the first study to explore the transmission paths for liquidity shocks in China’s segmented money market. We examine how money market transactions create such pathways between China’s closely-guarded banking sector and the rest of its financial system, and empirically capture the transmission of liquidity shocks through these pathways during two recent market events. We find strong indications that money market transactions allow liquidity shocks to circumvent certain regulatory restrictions and financial market segmentation in China. Our findings suggest that a widespread illiquidity contagion facilitated by money market transactions can happen in China and new policy measures are needed to prevent such contagion.

Suggested Citation

  • Lu, Ruoxi & Bessler, David A. & Leatham, David J., 2018. "The transmission of liquidity shocks via China's segmented money market: Evidence from recent market events," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 57(C), pages 110-126.
  • Handle: RePEc:eee:intfin:v:57:y:2018:i:c:p:110-126
    DOI: 10.1016/j.intfin.2018.07.005
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    References listed on IDEAS

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    More about this item

    Keywords

    Money market; Interbank market; Repo; Shibor; Liquidity shock; Transmission;

    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
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G2 - Financial Economics - - Financial Institutions and Services

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