Systemic Illiquidity Noise-based measure: A solution for systemic liquidity monitoring in frontier and emerging markets

The paper presents an alternative approach to measuring systemic illiquidity applicable to countries with frontier and emerging financial markets, where other existing methods are not applicable. We develop a novel Systemic Illiquidity Noise (SIN)-based measure, using the Nelson- Siegel-Svensson methodology in which we utilize the curve-fitting error as an indicator of financial system illiquidity. We empirically apply our method to a set of 10 divergent Central and Eastern Europe countries-Bulgaria, Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, and Slovakia-in the period of 2006-2020. The results show three periods of increased risk in the sample period: the global financial crisis, the European public debt crisis, and the COVID-19 pandemic. They also allow us to identify three divergent sets of countries with different systemic liquidity risk characteristics. The analysis also illustrates the impact of the introduction of the euro on systemic illiquidity risk. The proposed methodology may be of consequence for financial system regulators and macroprudential bodies: it allows for contemporaneous monitoring of discussed risk at a minimal cost using well-known models and easily accessible data.