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The EONIA spread before and during the crisis of 2007–2009: The role of liquidity and credit risk

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  • Beirne, John

Abstract

This paper provides an empirical assessment of the factors affecting the spread between the Euro Overnight Index Average (EONIA) and the main policy rate of the European Central Bank (ECB). Up until the period when Lehman Brothers collapsed in mid-September 2008, the spread was small and positive. After this point, the liquidity surplus that developed from the fixed rate full allotment tendering arrangement in refinancing operations drove the widening of EONIA spread (trading below the ECB policy rate), although other factors also played a significant role. This paper explains the drivers of spread across alternative non-crisis/crisis regimes. In addition, the paper examines how the EONIA spread reacts to shocks imposed on a range of liquidity and credit risk factors in alternative crisis/non-crisis regimes. The results have implications for factors that should be monitored closely across both regimes, and also the implications that this may have for steering an unsecured overnight rate in crisis times.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 31 (2012)
Issue (Month): 3 ()
Pages: 534-551

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Handle: RePEc:eee:jimfin:v:31:y:2012:i:3:p:534-551

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: EONIA spread; Liquidity risk; Credit risk;

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References

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Cited by:
  1. Hande Kucuk & Pinar Ozlu & Anil Talasli & Deren Unalmis & Canan Yuksel, 2013. "Likidite Yonetimi ve BIST Faiz Farki," CBT Research Notes in Economics 1325, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  2. Arnold, Marc & Schuette, Dustin & Wagner, Alexander, . "Pay Attention or Pay Extra: Evidence on the Compensation of Investors for the Implicit Credit Risk of Structured Products," Working Papers on Finance 1406, University of St. Gallen, School of Finance.
  3. Beaupain, Renaud & Durré, Alain, 2012. "Nonlinear liquidity adjustments in the euro area overnight money market," Working Paper Series 1500, European Central Bank.
  4. Beaupain, Renaud & Durré, Alain, 2013. "Central bank reserves and interbank market liquidity in the euro area," Journal of Financial Intermediation, Elsevier, vol. 22(2), pages 259-284.
  5. Hande Kucuk & Pinar Ozlu & Anil Talasli & Deren Unalmis & Canan Yuksel, 2014. "Interest Rate Corridor, Liquidity Management and the Overnight Spread," Working Papers 1402, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  6. Anamaria Illes & Marco Jacopo Lombardi, 2013. "Interest rate pass-through since the financial crisis," BIS Quarterly Review, Bank for International Settlements, September.

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