A Study On Liquidity Black Holes In Financial Crisis

Since the 1980's, with the development of financial globalization and liberalization, the risks faced by the international financial sector continue to increase, the stability of the financial system has been threatened not only by his country's economic operation but also by the country's economic fluctuation, the financial crisis outbreak one after another. Summing up the history of financial crises, we can find that the most important manifestation of the financial crisis is the liquidity black hole, in other words, the main feature of financial crisis is the disappearance of liquidity. Looking at the financial history of the world, a good market liquidity is the basis of the healthy and orderly development of financial markets. So in order to ensure ample liquidity in the market, from the formation of liquidity black holes in financial crisis to find out how to produce the liquidity black hole and the effect of liquidity black hole to the whole economy or even the world economy, it is meaningful for preventing the liquidity black hole of liquidity in financial crisis and improving the liquidity. In view of this, after clarifying the concept of liquidity and liquidity black hole, this paper gives the following researches:Firstly, at the background of financial crisis, this paper uses other researcher's model to confirm the theoretical hypothesis that there exist liquidity black holes in financial crisis. And using Markov Regime Switching method and crash model in structural break theory, this paper tests the existence of liquidity black hole in American Anron Event and American Subordinated debt crisis and confirm the regime of liquidity black hole which help the following research.Secondly, from the perspective of market expectations, this article uses theoretical and empirical methods to explain and research the causes of liquidity black holes. In the theoretical part, combining the Morris and Shin(2003) with Chendengta and Zhouyinggang(2005)'s market microstructure model, this paper adds the expectation into the model to explain the effect of expectation to the liquidity black hole in American Subordinated debt crisis; In the empirical part, this paper uses Tsallis entropy to construct the indicator of market expectation, and compare the effect of market expectation to liquidity before and after the American Subordinated debt crisis, and gets the conclusion that the market expectation has effect on the market liquidity. The results show that in the normal times of market functioning, the effect is insignificant, but in the time of crisis, the same market expectations reduce the market liquidity and market transaction.The difference between normal times and crisis times is caused by the presence of a homogeneous risk control mechanism in financial institutions, Accordingly, this paper puts forward some policy recommendations.Thirdly, the scope of the financial crisis is not limited to a single financial market, but is spread to all areas of financial markets. So this paper expands the areas of financial markets, and examine the conduction effect between the U.S. mortgage securities markets bank finance market, credit default swaps market and stock market liquidity. Empirical results show that the correlation enhanced in the period of liquidity black holes and confirms the conduction effect in financial crisis. And this paper use the stress testing method to test the effect of conduction to the portfolio strategy based on liquidity. The results show that because the correlation between the liquidity of financial markets increases, the behavior that the investors reduce the holdings of an asset will inevitably lead to reduced liquidity in other markets, and will touch on the liquidity trigger conditions, investors were forced to rebalance the portfolio based on liquidity making the financial market liquidity fall again, promoting the contagion effect of the liquidity black hole.Finally, the financial crisis is always associated with regional or global economic imbalance, the butterfly effect is shown by the fact that a country's crisis becomes the root causes of the crisis in other countries. In order to accurately predict the impact of the financial crisis originating in other countries on our country, it is necessary to do qualitative and quantitative research about the contagion effect of financial crisis, and provide the theoretical basis for the policy recommendations. Because the thesis is liquidity black hole in crisis in this paper, we do the theoretical and empirical research from the perspective of liquidity in crisis. In the theoretical part, according to the theory about the contagion of asset price in crisis and the theory about the relationship between asset return and liquidity, this paper provides the assumption that there exists contagion effect of liquidity black holes in financial crisis. In the empirical part, from the perspective of the linkage between the international financial markets, this paper uses copula function to test the contagion effect of liquidity black hole between Europe United States and Asian countries in financial crisis. The empirical results show that the contagion effects do exist during U.S. subprime crisis. In addition, empirical methods also give the causal direction of contagion. Finally, according to the above findings, this paper gives some policy recommendations to improve the liquidity and to ease the liquidity black hole.