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OUR ECONOMY

Spread and Liquidity Issues: A markets comparison

Sebastjan Strašek, Bor Bricelj

Abstract


The financial crises are closely connected with spread changes and liquidity issues.
After defining and addressing spread considerations, we research in this paper
the topic of liquidity issues in times of economic crisis. We analyse the liquidity
effects as recorded on spreads of securities from different markets. We stipulate
that higher international risk aversion in times of financial crises coincides with
widening security spreads. The paper then introduces liquidity as a risk factor into
the standard value-at-risk framework, using GARCH methodology. The comparison
of results of these models suggests that the size of the tested markets does
not have a strong effect on the models. Thus, we find that spread analysis is an
appropriate tool for analysing liquidity issues during a financial crisis.


Keywords


liquidity, financial crisis, GARCH VaR models

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