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Transmission of Liquidity Shocks; Evidence from the 2007 Subprime Crisis

Heiko Hesse, Nathaniel Frank and Brenda Gonzalez-Hermosillo

No 2008/200, IMF Working Papers from International Monetary Fund

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.

Keywords: Liquidity; Liquidity risk; Stock markets; Financial crises; Banking; WP,market,liquidity shock,market liquidity (search for similar items in EconPapers)
Pages: 21
Date: 2008-08-01
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Handle: RePEc:imf:imfwpa:2008/200