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An indicator of systemic liquidity risk in the Italian financial markets

Author

Listed:
  • Eleonora Iachini

    (Banca d'Italia)

  • Stefano Nobili

    (Banca d'Italia)

Abstract

This paper introduces a coincident indicator of systemic liquidity risk in the Italian financial markets. In order to take account of the systemic dimension of liquidity stress, standard portfolio theory is used. Three sub-indices, that reflect liquidity stress in specific market segments, are aggregated in the systemic liquidity risk indicator in the same way as individual risks are aggregated in order to quantify overall portfolio risk. The aggregation takes account of the time-varying cross-correlations between the sub-indices, using a multivariate GARCH approach. This is able to capture abrupt changes in the correlations and makes it possible for the indicator to identify systemic liquidity events precisely. We evaluate the indicator on its ability to match the results of a survey conducted among financial market experts to determine the most liquidity stressful events for the Italian financial markets. The results show that the systemic liquidity risk indicator accurately identifies events characterized by high systemic risk, while not exaggerating the level of stress during calm periods.

Suggested Citation

  • Eleonora Iachini & Stefano Nobili, 2014. "An indicator of systemic liquidity risk in the Italian financial markets," Questioni di Economia e Finanza (Occasional Papers) 217, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_217_14
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    References listed on IDEAS

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    Cited by:

    1. Arianna Miglietta & Fabrizio Venditti, 2019. "An indicator of macro-financial stress for Italy," Questioni di Economia e Finanza (Occasional Papers) 497, Bank of Italy, Economic Research and International Relations Area.
    2. Mr. Fei Han & Mindaugas Leika, 2019. "Integrating Solvency and Liquidity Stress Tests: The Use of Markov Regime-Switching Models," IMF Working Papers 2019/250, International Monetary Fund.
    3. Arianna Miglietta & Cristina Picillo & Mario Pietrunti, 2015. "The impact of CCPs' margin policies on repo markets," BIS Working Papers 515, Bank for International Settlements.
    4. A. Bernales & M. di Filippo, 2016. "The Information Contained in Money Market Interactions: Unsecured vs. Collateralized Lending," Working papers 598, Banque de France.
    5. Maria Ludovica Drudi & Stefano Nobili, 2021. "A liquidity risk early warning indicator for Italian banks: a machine learning approach," Temi di discussione (Economic working papers) 1337, Bank of Italy, Economic Research and International Relations Area.
    6. Miglietta, Arianna & Picillo, Cristina & Pietrunti, Mario, 2019. "The impact of margin policies on the Italian repo market," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    7. Patrik Kupkovic & Martin Suster, 2020. "Identifying the Financial Cycle in Slovakia," Working and Discussion Papers WP 2/2020, Research Department, National Bank of Slovakia.

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    More about this item

    Keywords

    financial crisis; liquidity risk; systemic risk; stress index; multivariate GARCH;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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