Investigating risk contagion initiated by endogenous liquidity shocks: evidence from the US and eurozone interbank market

Andrea Eross, Andrew Urquhart, Simon Wolfe

Research output: Contribution to journal › Article

Abstract

This paper investigates liquidity spillovers between the US and European interbank market 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.
LanguageEnglish
JournalEuropean Journal of Finance
StateAccepted/In press - 29 Mar 2016

Fingerprint

Interbank market
Liquidity shocks
Euro zone
Liquidity
Banking risk
Money market
Spillover
Regime change
Crash
Float
Assets
Transition probability
Time-varying
Contagion
Global financial crisis
Propagation
Swaps

Cite this

Eross, Andrea ; Urquhart, Andrew ; Wolfe, Simon. / Investigating risk contagion initiated by endogenous liquidity shocks: evidence from the US and eurozone interbank market. In: European Journal of Finance. 2016
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Eross, A, Urquhart, A & Wolfe, S 2016, 'Investigating risk contagion initiated by endogenous liquidity shocks: evidence from the US and eurozone interbank market' European Journal of Finance.

Investigating risk contagion initiated by endogenous liquidity shocks: evidence from the US and eurozone interbank market. / Eross, Andrea; Urquhart, Andrew; Wolfe, Simon.

In: European Journal of Finance, 29.03.2016.

Research output: Contribution to journal › Article

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N2 - This paper investigates liquidity spillovers between the US and European interbank market 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.

AB - This paper investigates liquidity spillovers between the US and European interbank market 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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Eross A, Urquhart A, Wolfe S. Investigating risk contagion initiated by endogenous liquidity shocks: evidence from the US and eurozone interbank market. European Journal of Finance. 2016 Mar 29.