Timing asset market peaks: the role of the liquidity risk cycle of the banking system
Recent financial crisis showed how the unfolding of liquidity risks of financial intermediaries spilled over to asset markets, contributing to asset price deteriorations and the triggering of liquidity spirals. This paper derives and tests a financial fragility condition for predicting asset price peaks on a real-time basis, by combining the term spread and the aggregate funding liquidity risks of the banking system into a simple binary fragility indicator. The main empirical result of this paper is that the fragility condition predicted all major equity market peaks in Germany during the time period 1973 to 2010, including the subprime crisis of 2007, the New Economy Bubble of 2000, and the 1987 stock market crash. The average lead time of the indicator is 2.9 months. About 80% of the declines were later on associated with significant declines in Industrial Production.
|Date of creation:||16 Jan 2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Markus K. Brunnermeier & Lasse Heje Pedersen, 2007.
"Market liquidity and funding liquidity,"
LSE Research Online Documents on Economics
24478, London School of Economics and Political Science, LSE Library.
- Lasse Heje Pederson & Markus K Brunnermeier, 2007. "Market Liquidity and Funding Liquidity," FMG Discussion Papers dp580, Financial Markets Group.
- Brunnermeier, Markus K & Pedersen, Lasse Heje, 2007. "Market Liquidity and Funding Liquidity," CEPR Discussion Papers 6179, C.E.P.R. Discussion Papers.
- Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market Liquidity and Funding Liquidity," NBER Working Papers 12939, National Bureau of Economic Research, Inc.
- Fecht, Falko, 2003.
"On the Stability of Different Financial Systems,"
Discussion Paper Series 1: Economic Studies
2003,10, Deutsche Bundesbank, Research Centre.
- Douglas W. Diamond & Philip H. Dybvig, 2000.
"Bank runs, deposit insurance, and liquidity,"
Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
- Arvind Krishnamurthy, 2010. "Amplification Mechanisms in Liquidity Crises," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 1-30, July.
- Allen N. Berger & Christa H. S. Bouwman, 2009. "Bank Liquidity Creation," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3779-3837, September.
- Adrian, Tobias & Shin, Hyun Song, 2010.
"Liquidity and leverage,"
Journal of Financial Intermediation,
Elsevier, vol. 19(3), pages 418-437, July.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:36061. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.