Investigating risk contagion initiated by endogenous liquidity shocks: evidence from the US and Eurozone interbank market
Investigating risk contagion initiated by endogenous liquidity shocks: evidence from the US and Eurozone interbank market
This paper investigates liquidity spillovers between the US and European interbank markets during turbulent and tranquil periods. We show that an endogenous model with time-varying transition probabilities is effective in describing the propagation of liquidity shocks within the interbank market, while predicting liquidity crashes characterised by changed dynamics. We show that liquidity shocks, originating from movements of the spread between the Asset Backed Commercial Paper and T-bill, drive regime changes in the euro fixed-float OIS swap rate. Our results support the idea of endogenous contagion from the US money market to the eurozone money market during the global financial crisis.
35-53
Eross, Andrea
7f124036-c1f2-402f-83c0-717b74753988
Urquhart, Andrew
ee369df1-95b5-4cdf-bc24-f1be77357c03
Wolfe, Simon
9a2367fc-36cc-496a-bbd2-e7346bcbb19e
2019
Eross, Andrea
7f124036-c1f2-402f-83c0-717b74753988
Urquhart, Andrew
ee369df1-95b5-4cdf-bc24-f1be77357c03
Wolfe, Simon
9a2367fc-36cc-496a-bbd2-e7346bcbb19e
Eross, Andrea, Urquhart, Andrew and Wolfe, Simon
(2019)
Investigating risk contagion initiated by endogenous liquidity shocks: evidence from the US and Eurozone interbank market.
European Journal of Finance, 25 (1), .
(doi:10.1080/1351847X.2018.1462840).
Abstract
This paper investigates liquidity spillovers between the US and European interbank markets during turbulent and tranquil periods. We show that an endogenous model with time-varying transition probabilities is effective in describing the propagation of liquidity shocks within the interbank market, while predicting liquidity crashes characterised by changed dynamics. We show that liquidity shocks, originating from movements of the spread between the Asset Backed Commercial Paper and T-bill, drive regime changes in the euro fixed-float OIS swap rate. Our results support the idea of endogenous contagion from the US money market to the eurozone money market during the global financial crisis.
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Investigating_Endogenous_Risk_Contagion_EJF
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Accepted/In Press date: 29 March 2018
e-pub ahead of print date: 23 April 2018
Published date: 2019
Identifiers
Local EPrints ID: 419310
URI: http://eprints.soton.ac.uk/id/eprint/419310
ISSN: 1351-847X
PURE UUID: e53206be-76a3-4a84-adc9-a04208f61da2
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Date deposited: 10 Apr 2018 16:30
Last modified: 16 Mar 2024 06:26
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Author:
Andrea Eross
Author:
Andrew Urquhart
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