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16.06.2016 | Original Article

Illiquidity Transmission in a Three-Country Framework: A Conditional Approach

verfasst von: Stefan Fiesel, Marliese Uhrig-Homburg

Erschienen in: Schmalenbach Business Review | Ausgabe 3-4/2016

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Abstract

In this paper we investigate the causality of liquidity in a three-country framework. Due to evidence that liquidity is of greater importance during crises and to provide a deeper insight into the dynamics of liquidity shocks between the United States, Germany, and the United Kingdom, we estimate a Markov-switching vector autoregression model and calculate impulse response functions for different economic states. Indeed, we find liquidity spillovers to be more pronounced during unstable periods and identify the leading role of the United States. Moreover, we use numerous macroeconomic and financial market variables to analyze the specific factors behind liquidity. The overall economic outlook and the condition of the U.S. financial market turn out to be important.

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Historical data for VFTSE is only dated back until 2000. Prior to that, we construct the index using the average of the next put and call FTSE index option with a remaining maturity of at least 21 business days. The correlation of the VFTSE and our approximation is more than 98 % after 2000 and therefore our proxy seems to be appropriate.

CPI does not have the expected sign in the univariate regression. Findings are mixed in the literature (e.g., Goyenko and Ukhov 2009; Goyenko et al. 2011) depending on the maturity and whether a bond is on-/off-the-run. Using realized CPI instead of forecasts results in insignificant coefficients.

Even constructing the binary vector Stress from regime probabilities of a Markov-switching model with German and British data only does not alter the result that most explanatory variables are based on U.S. data.

To strengthen our results, we used other approaches like lasso as robustness check. The results remain unaffected. Moreover, since our dependent variable Stress is an indicator for global liquidity crises we also defined global explanatory variables using first principal components of country-specific variables of the same type in the stepwise regression. However, this approach leads to an adjusted \(R^{2}\) of only 0.41.

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Titel: Illiquidity Transmission in a Three-Country Framework: A Conditional Approach
verfasst von: Stefan Fiesel
Marliese Uhrig-Homburg
Publikationsdatum: 16.06.2016
Verlag: Springer International Publishing
Erschienen in: Schmalenbach Business Review / Ausgabe 3-4/2016
Print ISSN: 1439-2917
Elektronische ISSN: 2194-072X
DOI: https://doi.org/10.1007/s41464-016-0016-5

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