Interbank Liquidity Risk Transmission to Large Emerging Markets in Crisis Periods

21 Pages Posted: 30 Sep 2020 Last revised: 20 Dec 2021

See all articles by Imtiaz Sifat

Imtiaz Sifat

Radboud University Nijmegen - Institute for Management Research

Alireza Zarei

Coventry University

Seyed Mehdi Hosseini

Cardiff University

Elie Bouri

Lebanese American University

Date Written: July 15, 2021

Abstract

We construct synthetic spreads representing funding liquidity risk in BRICS economies and examine whether stress in the interbank and financial markets in the US is transmitted to BRICS markets BRICS during the Global Financial Crisis, European Sovereign Debt Crisis, and COVID-19 pandemic. We rely on daily data and time-varying-parameter models with shrinkage priors. The results are as follows. First, global policy indicators are weakly associated with interbank credit market situations in BRICS economies. Instead, the state of US financial system matters more. This finding derives from the overwhelmingly significant results stemming from Chicago Fed’s NFCI indicator, which has a reputation for a leading indicator of US economic activities. Second, our results’ temporal patterns imply that key central banking decisions precede or coincide with reduced spillover. Third, we further examine whether interbank credit crunch depresses market liquidity in the corresponding domestic markets using a Granger causality approach. The results indicate that it often does, and the augmented conditional causality analysis shows that the state of fear and credit market conditions in the US economy holds some causal influence on the aforesaid relationship.

Keywords: Credit Risk, Liquidity, Bond Market, Stock Market, Risk Management, Central Banking, BRICS, Emerging Market, TED, VIX

Suggested Citation

Sifat, Imtiaz and Zarei, Alireza and Hosseini, Seyed Mehdi and Bouri, Elie, Interbank Liquidity Risk Transmission to Large Emerging Markets in Crisis Periods (July 15, 2021). Available at SSRN: https://ssrn.com/abstract=3702117 or http://dx.doi.org/10.2139/ssrn.3702117

Imtiaz Sifat (Contact Author)

Radboud University Nijmegen - Institute for Management Research ( email )

PO Box 9108
Nijmegen, 6500 HK
Netherlands

Alireza Zarei

Coventry University ( email )

Priory Street
Coventry, CV1 5FB
United Kingdom

Seyed Mehdi Hosseini

Cardiff University

Aberconway Building
Colum Drive
Cardiff, Wales CF10 3EU
United Kingdom

Elie Bouri

Lebanese American University ( email )

P.O.Box 36
Chouran-Beirut 1102 2801
Byblos
Lebanon

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