Faculty of Economics and Business Administration Publications Database

Modelling Illiquidity Spillovers with Hawkes Processes: An Application to the Sovereign Bond Market

Authors:
Fabrizio Lillo, Michael Schneider
Source:
Volume: 18
Pages: 283 - 293
ISSN-Print: 1469-7688
Link External Source: Online Version
Year: 2018
Keywords: Liquidity, Jump detection, Hawkes processes, Government bonds, MTS bond market
Abstract:

Modelling the dynamics of (il)liquidity across assets is an important yet complicated task, especially when considering significant deteriorations of liquidity conditions. Here, we propose a peak-over-threshold method to identify abrupt liquidity drops from limit order book data and we model the time-series of these illiquidity events across multiple assets as a multivariate Hawkes process. This allows us to quantify both the self-excitation of extreme changes of liquidity in the same asset (illiquidity spirals) and the cross-excitation across different assets (illiquidity spillovers). Applying the method to the MTS sovereign bond market, we find significant evidence for both illiquidity spillovers and spirals. The proportion of shocks explained by illiquidity spillovers roughly doubles from 2011 to 2015, suggesting an increased synchronization of extreme illiquidity across assets.

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