Risk of liquidity and contagion of the crisis on the United States, United Kingdom and euro zone money markets

The financial crisis has produced a generalized rise of the liquidity risk on the money markets. The purpose of this article is to highlight the mechanisms of contagion between the money markets of the United States, the United Kingdom and the Euro Zone. To give an account of these mechanisms, a BEKK model, in which we introduce a structural break, is adopted. Thus, this model explicitly tests the spillover effects of the liquidity risk premium on money markets. The results show that before the financial crisis (i.e. the reference period), there is a recursive propagation process between the Euro epsilon and the BP zones, a propagation process between the BP pound and the US pound areas and an obvious spread of volatilities from the EU epsilon zone towards the US$ zone;. During the crisis period, the liquidity problems start from the US money market to the UK pound and EU epsilon money markets. Copyright (c) 2011 John Wiley & Sons, Ltd.