Transmission of Liquidity Shocks: Evidence from the 2007 Subprime Crisis

Abstract

We examine the linkages between market and funding liquidity\npressures, as well as their interaction with solvency issues surrounding key nancial institutions during the 2007 subprime crisis. A multivari-ate GARCH model is estimated in order to test for the transmission of liquidity shocks across U.S. nancial markets. It is found that the interaction between market and funding illiquidity increases sharply during the recent period of nancial turbulence, and that bank sol-vency becomes important.