An early warning indicator for liquidity shortages in the interbank market

Andrea Eross, Andrew Urquhart, Simon Wolfe

Research output: Contribution to journalArticle

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.

LanguageEnglish
Pages1300-1312
Number of pages13
JournalInternational Journal of Finance and Economics
Volume24
Issue number3
Early online date6 Mar 2019
DOIs
Publication statusPublished - Jul 2019

Fingerprint

Shortage
Interbank market
Liquidity
Early warning
Crash
Random walk
Regime change
Gibbs sampler
Persistence
Regime-switching model
Structural breaks

Keywords

  • Bayesian inference
  • early warning indicator
  • interbank market
  • liquidity crises
  • regime switching

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

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An early warning indicator for liquidity shortages in the interbank market. / Eross, Andrea; Urquhart, Andrew; Wolfe, Simon.

In: International Journal of Finance and Economics, Vol. 24, No. 3, 07.2019, p. 1300-1312.

Research output: Contribution to journalArticle

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