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

Author

Listed:
  • Laurence Fung

    (Research Department, Hong Kong Monetary Authority)

  • Ip-wing Yu

    (Research Department, Hong Kong Monetary Authority)

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.

Suggested Citation

  • 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.
  • Handle: RePEc:hkg:wpaper:0909
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    File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP09_09_full.pdf
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    References listed on IDEAS

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    1. Kei Imakubo & Takeshi Kimura & Teppei Nagano, 2008. "Cross-currency transmission of money market tensions," Bank of Japan Review Series 08-E-2, Bank of Japan.
    2. 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, vol. 54(3), pages 461-472, August.
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    4. Edwards, Sebastian & Susmel, Raul, 2001. "Volatility dependence and contagion in emerging equity markets," Journal of Development Economics, Elsevier, vol. 66(2), pages 505-532, December.
    5. Fran├žois-Louis Michaud & Christian Upper, 2008. "What drives interbank rates? Evidence from the Libor panel," BIS Quarterly Review, Bank for International Settlements, March.
    6. Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 225-234, April.
    7. Ramchand, Latha & Susmel, Raul, 1998. "Volatility and cross correlation across major stock markets," Journal of Empirical Finance, Elsevier, vol. 5(4), pages 397-416, October.
    8. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333.
    9. Heiko Hesse & Nathaniel Frank & Brenda Gonzalez-Hermosillo, 2008. "Transmission of Liquidity Shocks; Evidence from the 2007 Subprime Crisis," IMF Working Papers 08/200, International Monetary Fund.
    10. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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    Citations

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    Cited by:

    1. Dewandaru, Ginanjar & Masih, Rumi & Masih, A. Mansur M., 2016. "Contagion and interdependence across Asia-Pacific equity markets: An analysis based on multi-horizon discrete and continuous wavelet transformations," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 363-377.
    2. repec:eee:ecmode:v:65:y:2017:i:c:p:30-40 is not listed on IDEAS
    3. Zhang, Wenlang & Zhang, Zhiwei & Han, Gaofeng, 2010. "How does the US credit crisis affect the Asia-Pacific economies?--Analysis based on a general equilibrium model," Journal of Asian Economics, Elsevier, vol. 21(3), pages 280-292, June.

    More about this item

    Keywords

    Interbank stress; Vector autoregression; Regime-switching ARCH;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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