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Asset class liquidity risk indicators. Timing the risk in the European and US equity and bond markets

Author

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  • Coppola, Anna
  • Urga, Giovanni
  • Varaldo, Alessandro

Abstract

In this paper, we propose asset class liquidity risk indicators constructed by aggregating financial, monetary and credit variables. We measure the presence of liquidity in six highly representative markets such as the Equity Europe, Long Term Italian Government Bond, Short Term Euro Government Bond, Equity US, Bond Corporate Investment Grade USD, Short Term US Government Bond markets over the period January 2007–January 2023. Our approach allows for a time-varying measure of the relative contribution of the raw drivers to the asset class indicators. We use endogenous Markov-switching models to identify episodes of financial distress which have characterized the behaviour of assets over the last two decades. Finally, we map the Markov-switching regimes with bubble episodes identified via recursive testing procedures.

Suggested Citation

  • Coppola, Anna & Urga, Giovanni & Varaldo, Alessandro, 2025. "Asset class liquidity risk indicators. Timing the risk in the European and US equity and bond markets," Journal of Financial Stability, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:finsta:v:76:y:2025:i:c:s1572308924001542
    DOI: 10.1016/j.jfs.2024.101369
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    Keywords

    Asset class liquidity risk indicators; Aggregation; Endogenous Markov-switching models; Bubble episodes;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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