[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/hal/journl/hal-01632782.html
   My bibliography  Save this paper

Liquidity Contagion. The Emerging Sovereign Debt Markets example

Author

Listed:
  • Serge Darolles

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Jeremy Dudek

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Gaëlle Le Fol

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

Abstract
Financial markets are today so interconnected that they are fragile to contagion. Massive investment funds with very short horizons in -and out- flows can generate contagion effects between markets. Since 2010, investors are willing to get a liquid exposure to the EMsovereign debt. As a consequence, some asset management firms started to propose products to track the performance of this asset class. However in that case, the fund manager faces a mismatch of liquidity between assets and liabilities and needs some tools to manage the liquidity of his investments. The main contribution of this paper is the analysis of contagion looking at common market liquidity problems to detect funding liquidity problems. Using the CDS Bond Spread basis as a liquidity indicator and a state space model with time-varying volatility specification, we show that during the 2007-2008 financial crisis, there exist pure contagion effects both in terms of price and liquidity on the emergings overeign debt market.This result has strong implication since the main risk for an asset manager is to get stuck with an unwanted position due to a dry-up of market liquidity.

Suggested Citation

  • Serge Darolles & Jeremy Dudek & Gaëlle Le Fol, 2013. "Liquidity Contagion. The Emerging Sovereign Debt Markets example," Post-Print hal-01632782, HAL.
    • Handle: RePEc:hal:journl:hal-01632782
    Note: View the original document on HAL open archive server: https://hal.science/hal-01632782
    as

    Download full text from publisher

    File URL: https://hal.science/hal-01632782/document
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. King, Mervyn A & Wadhwani, Sushil, 1990. "Transmission of Volatility between Stock Markets," The Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 5-33.
    2. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    3. Hasbrouck, Joel, 2004. "Liquidity in the Futures Pits: Inferring Market Dynamics from Incomplete Data," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(2), pages 305-326, June.
    4. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," The Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
    5. Gromb, Denis & Vayanos, Dimitri, 2002. "Equilibrium and welfare in markets with financially constrained arbitrageurs," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 361-407.
    6. Francois Chesnay & Eric Jondeau, 2001. "Does Correlation Between Stock Returns Really Increase During Turbulent Periods?," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 30(1), pages 53-80, February.
    7. Bertero, Elisabetta & Mayer, Colin, 1990. "Structure and performance: Global interdependence of stock markets around the crash of October 1987," European Economic Review, Elsevier, vol. 34(6), pages 1155-1180, September.
    8. Chiang, Thomas C. & Jeon, Bang Nam & Li, Huimin, 2007. "Dynamic correlation analysis of financial contagion: Evidence from Asian markets," Journal of International Money and Finance, Elsevier, vol. 26(7), pages 1206-1228, November.
    9. Morris, Stephen & Shin, Hyun Song, 2004. "Coordination risk and the price of debt," European Economic Review, Elsevier, vol. 48(1), pages 133-153, February.
    10. Pelletier, Denis, 2006. "Regime switching for dynamic correlations," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 445-473.
    11. Rigobon, Roberto, 2003. "On the measurement of the international propagation of shocks: is the transmission stable?," Journal of International Economics, Elsevier, vol. 61(2), pages 261-283, December.
    12. Roberto Rigobon, 2002. "Contagion: How to Measure It?," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 269-334, National Bureau of Economic Research, Inc.
    13. Monica Billio & Massimiliano Caporin, 2005. "Multivariate Markov switching dynamic conditional correlation GARCH representations for contagion analysis," Statistical Methods & Applications, Springer;Società Italiana di Statistica, vol. 14(2), pages 145-161, November.
    14. Zakoian, Jean-Michel, 1994. "Threshold heteroskedastic models," Journal of Economic Dynamics and Control, Elsevier, vol. 18(5), pages 931-955, September.
    15. Lesmond, David A & Ogden, Joseph P & Trzcinka, Charles A, 1999. "A New Estimate of Transaction Costs," The Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 1113-1141.
    16. Edwards, Sebastian & Susmel, Raul, 2001. "Volatility dependence and contagion in emerging equity markets," Journal of Development Economics, Elsevier, vol. 66(2), pages 505-532, December.
    17. Fontana, Alessandro & Scheicher, Martin, 2016. "An analysis of euro area sovereign CDS and their relation with government bonds," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 126-140.
    18. Hamao, Yasushi & Masulis, Ronald W & Ng, Victor, 1990. "Correlations in Price Changes and Volatility across International Stock Markets," The Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 281-307.
    19. Bekaert, Geert & Harvey, Campbell R., 2003. "Emerging markets finance," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 3-56, February.
    20. Kristin J. Forbes & Roberto Rigobon, 2002. "No Contagion, Only Interdependence: Measuring Stock Market Comovements," Journal of Finance, American Finance Association, vol. 57(5), pages 2223-2261, October.
    21. Kenourgios, Dimitris & Samitas, Aristeidis & Paltalidis, Nikos, 2011. "Financial crises and stock market contagion in a multivariate time-varying asymmetric framework," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(1), pages 92-106, February.
    22. Giamouridis, Daniel & Vrontos, Ioannis D., 2007. "Hedge fund portfolio construction: A comparison of static and dynamic approaches," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 199-217, January.
    23. Garcia, Rene, 1998. "Asymptotic Null Distribution of the Likelihood Ratio Test in Markov Switching Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 763-788, August.
    24. Wang, Kuan-Min & Nguyen Thi, Thanh-Binh, 2007. "Testing for contagion under asymmetric dynamics: Evidence from the stock markets between US and Taiwan," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 376(C), pages 422-432.
    25. Ramchand, Latha & Susmel, Raul, 1998. "Volatility and cross correlation across major stock markets," Journal of Empirical Finance, Elsevier, vol. 5(4), pages 397-416, October.
    26. Roll, Richard, 1984. "A Simple Implicit Measure of the Effective Bid-Ask Spread in an Efficient Market," Journal of Finance, American Finance Association, vol. 39(4), pages 1127-1139, September.
    27. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
    28. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
    29. Goyenko, Ruslan Y. & Holden, Craig W. & Trzcinka, Charles A., 2009. "Do liquidity measures measure liquidity?," Journal of Financial Economics, Elsevier, vol. 92(2), pages 153-181, May.
    30. Calvo, Sara & Reinhart, Carmen, 1996. "Capital flows to Latin America : Is there evidence of contagion effects?," Policy Research Working Paper Series 1619, The World Bank.
    31. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ballester, Laura & Díaz-Mendoza, Ana Carmen & González-Urteaga, Ana, 2019. "A systematic review of sovereign connectedness on emerging economies," International Review of Financial Analysis, Elsevier, vol. 62(C), pages 157-163.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dudek, Jérémy, 2013. "Illiquidité, contagion et risque systémique," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/13236 edited by Le Fol, Gaëlle.
    2. Serge Darolles & Jeremy Dudek & Gaëlle Le Fol, 2014. "Liquidity risk and contagion for liquid funds," Post-Print hal-01632776, HAL.
    3. Rajan Sruthi & Santhakumar Shijin, 2020. "Investigating liquidity constraints as a channel of contagion: a regime switching approach," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 6(1), pages 1-21, December.
    4. Serge Darolles & Jérémy Dudek & Gaëlle Le Fol, 2015. "Contagion in Emerging Markets," Palgrave Macmillan Books, in: Nigel Finch (ed.), Emerging Markets and Sovereign Risk, chapter 3, pages 45-58, Palgrave Macmillan.
    5. Ana Escribano & Cristina Íñiguez, 2021. "The contagion phenomena of the Brexit process on main stock markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4462-4481, July.
    6. Maria Kasch & Massimiliano Caporin, 2013. "Volatility Threshold Dynamic Conditional Correlations: An International Analysis," Journal of Financial Econometrics, Oxford University Press, vol. 11(4), pages 706-742, September.
    7. Kole, Erik & Koedijk, Kees & Verbeek, Marno, 2006. "Portfolio implications of systemic crises," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2347-2369, August.
    8. Ozer-Imer, Itir & Ozkan, Ibrahim, 2014. "An empirical analysis of currency volatilities during the recent global financial crisis," Economic Modelling, Elsevier, vol. 43(C), pages 394-406.
    9. Kim, Bong-Han & Kim, Hyeongwoo & Lee, Bong-Soo, 2015. "Spillover effects of the U.S. financial crisis on financial markets in emerging Asian countries," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 192-210.
    10. Aymen Ben Rejeb & Adel Boughrara, 2015. "Financial integration in emerging market economies: Effects on volatility transmission and contagion," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 15(3), pages 161-179, September.
    11. Pappas, Vasileios & Ingham, Hilary & Izzeldin, Marwan & Steele, Gerry, 2016. "Will the crisis “tear us apart”? Evidence from the EU," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 346-360.
    12. Claudeci Da Silva & Hugo Agudelo Murillo & Joaquim Miguel Couto, 2014. "Early Warning Systems: Análise De Ummodelo Probit De Contágio De Crise Dos Estados Unidos Para O Brasil(2000-2010)," Anais do XL Encontro Nacional de Economia [Proceedings of the 40th Brazilian Economics Meeting] 110, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    13. Francois Chesnay & Eric Jondeau, 2001. "Does Correlation Between Stock Returns Really Increase During Turbulent Periods?," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 30(1), pages 53-80, February.
    14. Woon Sau Leung & Nicholas Taylor, 2013. "Testing for contagion: the impact of US structured markets on international financial markets," Chapters, in: Adrian R. Bell & Chris Brooks & Marcel Prokopczuk (ed.), Handbook of Research Methods and Applications in Empirical Finance, chapter 11, pages 256-284, Edward Elgar Publishing.
    15. Oussama Tilfani & Paulo Ferreira & My Youssef El Boukfaoui, 2021. "Dynamic cross-correlation and dynamic contagion of stock markets: a sliding windows approach with the DCCA correlation coefficient," Empirical Economics, Springer, vol. 60(3), pages 1127-1156, March.
    16. Kuan-Min Wang & Hung-Cheng Lai, 2013. "Which Global Stock Indices Trigger Stronger Contagion Risk in the Vietnamese Stock Market? Evidence Using a Bivariate Analysis," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(4), pages 473-497, June.
    17. Kuan-Min Wang, 2013. "Did Vietnam stock market avoid the “contagion risk” from China and the U.S.? The contagion effect test with dynamic correlation coefficients," Quality & Quantity: International Journal of Methodology, Springer, vol. 47(4), pages 2143-2161, June.
    18. Samarakoon, Lalith P., 2011. "Stock market interdependence, contagion, and the U.S. financial crisis: The case of emerging and frontier markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(5), pages 724-742.
    19. Kundu, Srikanta & Sarkar, Nityananda, 2016. "Return and volatility interdependences in up and down markets across developed and emerging countries," Research in International Business and Finance, Elsevier, vol. 36(C), pages 297-311.
    20. Bensafta, Kamel Malik & Semedo, Gervasio, 2009. "De la transmission de la volatilité à la contagion entre marchés boursiers : l’éclairage d’un modèle VAR non linéaire avec bris structurels en variance," L'Actualité Economique, Société Canadienne de Science Economique, vol. 85(1), pages 13-76, mars.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:journl:hal-01632782. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.