Market Liquidity, Correlation and International Financial Crises
Project Leader: Mardi Dungey
with: Lyudmyla Hvozdyk
The first stage of this project involves estimating the liquidity premium by means of available financial market data such as interest rate spreads. The relevant data would include sector-specific and country-specific sources. Systematic comparison of the statistical properties of alternative measures will aid in assessing their relative merits.
The second stage will investigate the correlation between liquidity measures and broad macroeconomic performance indicators. The time-varying properties of such correlations will shed light on public policy proposals to reform sovereign liquidity management in order to avert international financial crises.
The final aspect, encompassing the other two, is the study of causality between liquidity and financial crises. Distinguishing between correlation and causality will contribute to understanding the onset of financial contagion. The three-year programme will relate to recent theoretical work on liquidity preferences at the microeconomic level and contagion integrating beliefs-based and fundamental-based crisis models.
A major new output for the project has been the successful submission of a book manuscript to Oxford University Press. The book, to be titled Transmission of Financial Crises and Contagion: A Latent Factor Approach, is coauthored by Mardi Dungey, Renee Fry (ANU and CFAP), Brenda Gonzalez-Hermosillo (IMF) and Vance Martin (University of Melbourne). The final manuscript is due for publication in early 2010.
The project has continued its attraction of visitors to the centre, with both Michael McKenzie (University of Sydney) and Olan Henry (University of Melbourne) visiting during 2009, both in periods of overlap with Dungey and independently.