Investigating Risk Contagion Initiated by Endogenous Liquidity Shocks: Evidence from the US and Eurozone Interbank Market

35 Pages Posted: 19 Mar 2016 Last revised: 5 Feb 2018

See all articles by Andrea Eross

Andrea Eross

Heriot-Watt University

Andrew Urquhart

ICMA Centre, Henley Business School

Simon Wolfe

University of Southampton - School of Management; University of Southampton - Southampton Business School

Date Written: February 5, 2018

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.

Keywords: Contagion, Endogenous risk, Financial crisis, Interbank market, Liquidity shocks, Regime switching

JEL Classification: C11, F37, G01

Suggested Citation

Eross, Andrea and Urquhart, Andrew and Wolfe, Simon, Investigating Risk Contagion Initiated by Endogenous Liquidity Shocks: Evidence from the US and Eurozone Interbank Market (February 5, 2018). Available at SSRN: https://ssrn.com/abstract=2749223 or http://dx.doi.org/10.2139/ssrn.2749223

Andrea Eross (Contact Author)

Heriot-Watt University ( email )

Mary Burton Building
School of Social Sciences
Edinburgh, Midlothian EH14 4AS
United Kingdom

Andrew Urquhart

ICMA Centre, Henley Business School ( email )

University of Reading
Whiteknights
Reading, Berkshire RG6 6BA
United Kingdom

Simon Wolfe

University of Southampton - School of Management ( email )

Highfield
Southampton S017 1BJ, Hampshire SO17 1BJ
United Kingdom

University of Southampton - Southampton Business School ( email )

Southampton, SO17 1BJ
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
70
Abstract Views
348
rank
327,269
PlumX Metrics