Transmission of Liquidity Shocks: Evidence From the 2007 Subprime Crisis

Abstract

We examine the linkages between market and funding liquidity pressures, as well as theirinteraction with solvency issues surrounding key financial institutions during the 2007subprime crisis. A multivariate GARCH model is estimated in order to test for thetransmission of liquidity shocks across U.S. financial markets. It is found that the interactionbetween market and funding illiquidity increases sharply during the recent period of financialturbulence, and that bank solvency becomes important.