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Liquidity Contagion. The Emerging Sovereign Debt Markets example

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20120910_Tex_Basis_v19.pdf (301.4Kb)
Date
2012
Dewey
Economie financière
Sujet
Sovereign Debt Market; Emerging Markets; Contagion E?ects; Regime Switching models; Liquidity Risk Management; Liquidity
JEL code
G.G0.G01; G.G1.G15; C.C0.C01; C.C3.C32
Conference name
European Economic Association & Econometric Society
Conference date
08-2012
Conference city
Malaga
Conference country
SPAIN
URI
https://basepub.dauphine.fr/handle/123456789/10337
Collections
  • DRM : Publications
Metadata
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Author
Darolles, Serge
1032 Dauphine Recherches en Management [DRM]
Dudek, Jérémy
1032 Dauphine Recherches en Management [DRM]
Le Fol, Gaëlle
1032 Dauphine Recherches en Management [DRM]
Type
Communication / Conférence
Abstract (EN)
Emerging economies have passed an important stress test during the period 2008-09 and are now the key drivers for global growth of the world economy. Financial markets are today so interconnected that they are fragile to contagion. The issue of financial contagion was historically concerning Emerging Markets (EM). These latter attract foreign investors and massive investments funds in -and out- flows on very short horizons can be a source of contagion effects between markets. The analysis of the sovereign debt markets and particularly related CDS markets is of interest since it is at the very center of a new phenomenon: banks are not anymore the main source of systemic risk but sovereign economies are. As foreign investors represent the most of the volume traded, capital flows in these markets should also impact FX market. Their analysis is thus also central to this study. Indeed, the main risk for an asset manager is to get stuck with unwanted sovereign debt due to a dry up of market liquidity. The main contribution of this paper is the analysis of contagion looking at common markets liquidity problems to detect funding liquidity problems. We use the Credit Default Swap bond spread basis and the deviations from the Covered Interest Parity as liquidity measures respectively for sovereign debt and FX markets. Moreover, we distinguish interdependence and pure contagion using a state-space model with a time-varying volatility specification and we apply it to both returns and liquidity indicators.

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