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Liquidity risk and contagion for liquid funds

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Date
2014
Dewey
Economie financière
Sujet
Liquidity; Sovereign Debt Market; Emerging Markets; Switching models; Contagion Effects; Regime; Liquidity Risk Management
JEL code
G.G0.G01; G.G1.G15; C.C0.C01; C.C3.C32
Conference name
31st International French Finance Association Conference, AFFI 2014
Conference date
05-2014
Conference city
Aix-en-Provence
Conference country
FRANCE
URI
https://basepub.dauphine.fr/handle/123456789/13621
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)
Fund managers face liquidity problems but they have to distinguish the market liquidity risk implied by their assets and the funding liquidity risk. This latter is due to both the liquidity mismatch between assets and liabilities and the redemption risk due to the possible outflows from clients. The main contribution of this paper is the analysis of contagion looking at common market liquidity problems to detect funding liquidity problems. Using the CDS Bond Spread basis as a liquidity indicator and a state space model with time-varying volatility specification, we show that during the 2007-2008 financial crisis, there exist pure contagion effects both in terms of price and liquidity on the emerging sovereign debt market. This result has strong implication since the main risk for an asset manager is to get stuck with an unwanted position due to a dry-up of market liquidity.

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