Abstract
This paper seeks to elucidate dimensions and directions of the liquidity spillover phenomenon in the Eurozone equity markets during the global financial crisis of 2007–2008. The research examines questions relevant to the shift-contagion in the Eurozone countries during the time of crisis, as well as the role of a liquidity channel of transmission relaying external shocks among those countries. The findings document the existence of non-linearities in the transmission mechanisms across selected markets; we use a structural model introduced by Favero and Giavazzi (2002) while controlling for interdependence. The result is in line with the crisis-contingent theories that suggest transmission of shocks through an endogenous liquidity channel. Furthermore, we notice a pattern of liquidity spillover from small markets to the German, French, Italian and UK markets even after controlling for monetary policy shocks, and we confirm the persistence of liquidity co-movements, supporting the argument that financial contagion in the Eurozone market was transmitted and intensified via the liquidity channel.
•We elucidate directions of the liquidity spillover phenomenon in the Eurozone equity markets during the GFC.•We reveal the persistence of liquidity co-movements.•We document the existence of non-linearities in the transmission mechanisms across some selected markets.•We present evidence supporting the argument that financial spillover was intensified via the liquidity channel.