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An early warning indicator for liquidity shortages in the interbank market
Author(s) -
Eross Andrea,
Urquhart Andrew,
Wolfe Simon
Publication year - 2019
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1719
Subject(s) - market liquidity , interbank lending market , economics , libor , warning system , liquidity crisis , econometrics , autoregressive model , economic shortage , liquidity risk , money market , monetary economics , interest rate , linguistics , philosophy , engineering , government (linguistics) , aerospace engineering
This study investigates an early warning indicator for liquidity shortages in the short‐term interbank market. To identify structural breaks and their persistence, an autoregressive two‐state regime switching model is presented. The variability in the LIBOR–OIS spread along with thresholds, which delimit four intensities, reveals regime changes consistent with liquidity crashes. The transition between the states is state dependent, and the posterior estimates for the crisis and noncrisis states are estimated using the Gibbs sampler. We forecast our early warning indicator up to December 2011 and show that the estimates are superior to a random walk with drift. Therefore, the model is an effective early warning indicator of an imminent liquidity shortage impacting the interbank market.