An early warning indicator for liquidity shortages in the interbank market
An early warning indicator for liquidity shortages in the interbank market
This study investigates an early warning indicator for liquidity shortages in the short‐term interbank market. To identify structural breaks and their persistence, an autoregressive two‐state regime switching model is presented. The variability in the LIBOR–OIS spread along with thresholds, which delimit four intensities, reveals regime changes consistent with liquidity crashes. The transition between the states is state dependent, and the posterior estimates for the crisis and noncrisis states are estimated using the Gibbs sampler. We forecast our early warning indicator up to December 2011 and show that the estimates are superior to a random walk with drift. Therefore, the model is an effective early warning indicator of an imminent liquidity shortage impacting the interbank market.
Wolfe, Simon
9a2367fc-36cc-496a-bbd2-e7346bcbb19e
Urquhart, Andrew J
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Eross, Andrea
7f124036-c1f2-402f-83c0-717b74753988
Wolfe, Simon
9a2367fc-36cc-496a-bbd2-e7346bcbb19e
Urquhart, Andrew J
ee369df1-95b5-4cdf-bc24-f1be77357c03
Eross, Andrea
7f124036-c1f2-402f-83c0-717b74753988
Wolfe, Simon, Urquhart, Andrew J and Eross, Andrea
(2019)
An early warning indicator for liquidity shortages in the interbank market.
International Journal of Finance & Economics.
(doi:10.1002/ijfe.1719).
Abstract
This study investigates an early warning indicator for liquidity shortages in the short‐term interbank market. To identify structural breaks and their persistence, an autoregressive two‐state regime switching model is presented. The variability in the LIBOR–OIS spread along with thresholds, which delimit four intensities, reveals regime changes consistent with liquidity crashes. The transition between the states is state dependent, and the posterior estimates for the crisis and noncrisis states are estimated using the Gibbs sampler. We forecast our early warning indicator up to December 2011 and show that the estimates are superior to a random walk with drift. Therefore, the model is an effective early warning indicator of an imminent liquidity shortage impacting the interbank market.
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EarlyWarningIndicator
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Accepted/In Press date: 30 December 2018
e-pub ahead of print date: 6 March 2019
Identifiers
Local EPrints ID: 427447
URI: http://eprints.soton.ac.uk/id/eprint/427447
ISSN: 1076-9307
PURE UUID: 19cdd52d-6023-4161-93c9-674f2ee5727e
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Date deposited: 16 Jan 2019 17:30
Last modified: 16 Mar 2024 07:44
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Author:
Andrew J Urquhart
Author:
Andrea Eross
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