Interbank liquidity risk transmission to large emerging markets in crisis periods

Imtiaz Sifat, Alireza Zarei, Mehdi Hosseini, Elie Bouri

Research output: Contribution to journalArticlepeer-review

Abstract

In this paper, we conduct two investigations regarding funding liquidity risk in large emerging economies: Brazil, Russia, India, China, and South Africa — BRICS. In the first, we track the relevance of monetary policy decisions originating in developed economies for interbank funding liquidity risk in BRICS economies during crisis periods by applying a time-varying parameter model in a Bayesian framework. The results indicate weak associations between interbank credit market and monetary policy and market conditions in the US. In contrast, the Federal Reserve's National Financial Conditions Index (NFCI) — a representative of the health of both real and financial sectors in the US — matters more. The temporal patterns of the results imply that key central banking decisions precede or coincide with low degrees of associations. In the second, we examine whether interbank credit crunch exerts an influence on market liquidity risk in BRICS economies using a Granger causality approach. The results reveal that interbank credit crunch depresses market liquidity in the corresponding domestic market and that the state of fear and credit market conditions in the US exert some influence in this regard. Overall, our findings hint at judicious market intervention and liquidity management by BRICS central banks.
Original languageEnglish
Article number102200
JournalInternational Review of Financial Analysis
Volume82
Early online date10 May 2022
DOIs
Publication statusE-pub ahead of print - 10 May 2022

Keywords

  • Credit risk
  • Liquidity risk
  • Bond market
  • Stock market
  • BRICS
  • TED
  • US VIX

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