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What drives contagion in financial markets?: liquidity versus information spill-over

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<mark>Journal publication date</mark>06/2014
<mark>Journal</mark>European Financial Management
Issue number3
Volume20
Number of pages26
Pages (from-to)548-573
Publication statusPublished
Early online date27/08/13
Original languageEnglish

Abstract

The objective of this paper is to study how contagion works in financial markets by identifying the mechanisms which drive the spill-over of shocks from one market to other markets. To address this question we use open-ended property funds (OPFs) as they offer a unique institutional setting which allows separating between liquidity and information spill-over. We find that that liquidity risk captures the observed discounts very well when the danger of potential future impairments is low. Once the impending NAV impairments become very likely, also this component matters and attributes for a fraction of the total discount.