EconPapers    
Economics at your fingertips  
 

Measuring Contagion-Induced Funding Liquidity Risk in Sovereign Debt Markets

Cho-Hoi Hui, Chi-Fai Lo, Xiao-Fen Zheng and Tom Fong
Additional contact information
Cho-Hoi Hui: Hong Kong Monetary Authority
Chi-Fai Lo: The Chinese University of Hong Kong
Xiao-Fen Zheng: The Chinese University of Hong Kong
Tom Fong: Hong Kong Monetary Authority

No 182015, Working Papers from Hong Kong Institute for Monetary Research

Abstract: The euro-area sovereign debt crisis demonstrated how liquidity shocks can build up in a sovereign debt market due to contagion. This paper proposes a model based on the probability density associated with the dynamics of sovereign bond spreads to measure contagion-induced systemic funding liquidity risk in the market. The two risk measures with closed-form formulas derived from the model, are (1) the rate of change of the probability of triggering a liquidity shock determined by the joint sovereign bond spread dynamics of the systemically important countries (i.e., Italy and Spain) and small country (i.e., Portugal); and (2) the distress correlation between bond spreads, which can provide forward-looking signals of such risk. A signal of the rate of change of the joint probability appeared in April 2011 before the liquidity shock occurred in November 2011. There exist endogenous critical levels of sovereign spreads, above which the signal materializes. The empirical results show that when funding cost, risk aversion and equity prices pass through certain levels, the rate of change of the joint probability will rise sharply.

Keywords: European Sovereign Debt Crisis; Liquidity Risk; Contagion (search for similar items in EconPapers)
JEL-codes: F30 G13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-fmk and nep-opm
Date: 2015-08
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.hkimr.org/uploads/publication/424/wp-no-18_2015-final-.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:hkm:wpaper:182015

Access Statistics for this paper

More papers in Working Papers from Hong Kong Institute for Monetary Research Contact information at EDIRC.
Bibliographic data for series maintained by HKIMR ().

 
Page updated 2019-04-12
Handle: RePEc:hkm:wpaper:182015