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Transmission of Liquidity Shocks: Evidence from the 2007 Subprime Crisis

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Listed:
  • Mr. Heiko Hesse
  • Nathaniel Frank
  • Ms. Brenda Gonzalez-Hermosillo

Abstract

We examine the linkages between market and funding liquidity pressures, as well as their interaction with solvency issues surrounding key financial institutions during the 2007 subprime crisis. A multivariate GARCH model is estimated in order to test for the transmission of liquidity shocks across U.S. financial markets. It is found that the interaction between market and funding illiquidity increases sharply during the recent period of financial turbulence, and that bank solvency becomes important.

Suggested Citation

  • Mr. Heiko Hesse & Nathaniel Frank & Ms. Brenda Gonzalez-Hermosillo, 2008. "Transmission of Liquidity Shocks: Evidence from the 2007 Subprime Crisis," IMF Working Papers 2008/200, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2008/200
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    References listed on IDEAS

    as
    1. Michael J. Fleming, 2003. "Measuring treasury market liquidity," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 83-108.
    2. Lorenzo Cappiello & Robert F. Engle & Kevin Sheppard, 2006. "Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns," Journal of Financial Econometrics, Oxford University Press, vol. 4(4), pages 537-572.
    3. Giovanni Dell’ariccia & Deniz Igan & Luc Laeven, 2012. "Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 367-384, March.
    4. Mr. Paul S. Mills & Mr. John Kiff, 2007. "Money for Nothing and Checks for Free: Recent Developments in U.S. Subprime Mortgage Markets," IMF Working Papers 2007/188, International Monetary Fund.
    5. François-Louis Michaud & Christian Upper, 2008. "What drives interbank rates? Evidence from the Libor panel," BIS Quarterly Review, Bank for International Settlements, March.
    6. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-350, July.
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