Illiquidity Comovement and Market Crisis

This paper presents a rational expectation equilibrium model to explore how the financial contagion occurs between the unlinked markets that do not share common fundamentals. In the proposed model, the authors assume two of the three risky assets share no common fundamental factors, but are connecte...

Full description

Saved in:
Bibliographic Details
Published in:Journal of systems science and complexity 2022-10, Vol.35 (5), p.1863-1874
Main Authors: Zeng, Qingduo, Zhang, Qiang, Liu, Shancun, Yang, Yaodong
Format: Article
Language:English
Subjects:
Complex Systems
Control
Mathematics
Mathematics and Statistics
Mathematics of Computing
Operations Research/Decision Theory
Statistics
Systems Theory
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:This paper presents a rational expectation equilibrium model to explore how the financial contagion occurs between the unlinked markets that do not share common fundamentals. In the proposed model, the authors assume two of the three risky assets share no common fundamental factors, but are connected by one intermediate asset via cross fundamentals. Through this channel, investors transmit fundamental risk from one asset to another by dint of the cross fundamentals. This mechanism causes liquidity comovement and subsequently becomes a source of market crisis: Through the contagion mechanism, an initial liquidity shock in one asset can result in a drop tendency in liquidity and price informativeness for another asset. Such comovement in liquidity offers a new explanation for idiosyncratic assets in financial contagion.
ISSN:1009-6124
1559-7067
DOI:10.1007/s11424-022-0299-1