Liquidity risk and contagion for liquid funds

Serge Darolles (1) , Jeremy Dudek (1) , Gaëlle Le Fol (1)

1 DRM - Dauphine Recherches en Management

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.

Mots clés: Liquidity; Sovereign Debt Market; Emerging Markets; Switching models; Contagion Effects; Regime; Liquidity Risk Management

Domaines: Gestion et management

Serge Darolles, Jeremy Dudek, Gaëlle Le Fol. Liquidity risk and contagion for liquid funds. 31st International French Finance Association Conference, AFFI 2014, May 2014, Aix-en-Provence, France. ⟨hal-01632776⟩