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Liquidity Contagion. The Emerging Sovereign Debt Markets example

Darolles, Serge; Dudek, Jérémy; Le Fol, Gaëlle (2013), Liquidity Contagion. The Emerging Sovereign Debt Markets example, 30th International French Finance Association Conference, Lyon, FRANCE

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Type
Communication / Conférence
Date
2013
Conference title
30th International French Finance Association Conference
Conference city
Lyon
Conference country
FRANCE
Metadata
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Author(s)
Darolles, Serge
Dauphine Recherches en Management [DRM]
Dudek, Jérémy
Dauphine Recherches en Management [DRM]
Le Fol, Gaëlle
Dauphine Recherches en Management [DRM]
Abstract (EN)
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.
Subjects / Keywords
Liquidity; Regime Switching models; Contagion Effects; Emerging Markets; Sovereign Debt Market; Liquidity Risk Management
JEL
G01 - Financial Crises
G15 - International Financial Markets
C01 - Econometrics
C32 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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