EconPapers    
Economics at your fingertips  
 

An indicator of systemic liquidity risk in the Italian financial markets

Eleonora Iachini () and Stefano Nobili
Additional contact information
Eleonora Iachini: Banca d'Italia

No 217, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

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.

Keywords: financial crisis; liquidity risk; systemic risk; stress index; multivariate GARCH (search for similar items in EconPapers)
JEL-codes: G01 G10 G20 (search for similar items in EconPapers)
Date: 2014-04
New Economics Papers: this item is included in nep-ban, nep-mst and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed

Downloads: (external link)
http://www.bancaditalia.it/pubblicazioni/qef/2014-0217/QEF_217.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_217_14

Access Statistics for this paper

More papers in Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2020-08-03
Handle: RePEc:bdi:opques:qef_217_14