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An Assessment of the Bank of Canada's Term PRA Facility

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Author Info

  • Emanuella Enenajor
  • Alex Sebastian
  • Jonathan Witmer

Abstract

This paper empirically assesses the effectiveness of the Bank of Canada's term Purchase and Resale Agreement (PRA) facility in reducing short-term bank funding pressures, as measured by the CDOR-OIS spread. It examines the behaviour of this spread around both term PRA announcement dates and term PRA operation dates, using an event-study methodology to control for developments in other money markets (i.e., using the U.S. LIBOR-OIS spread) as well as proxies for Canadian banking sector credit risk. Overall, there is robust evidence that the term PRA announcements reduced bank funding costs at both 1-month and 3-month terms, whereas we find no evidence of an impact from term PRA operations. However, given the small number of term PRA announcements in our sample, caution should be taken in attributing the reduction in the CDOR-OIS spread solely to the term PRA announcements, since other concurrent events (including other announcements by the Bank of Canada) may have also contributed to a compression in the CDOR-OIS spread.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 10-20.

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Length: 33 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:bca:bocawp:10-20

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Related research

Keywords: Financial markets; Financial stability;

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References

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  1. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
  2. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
  3. Baba, Naohiko & Packer, Frank, 2009. "From turmoil to crisis: Dislocations in the FX swap market before and after the failure of Lehman Brothers," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1350-1374, December.
  4. Naohiko Baba & Frank Packer, 2009. "From turmoil to crisis: dislocations in the FX swap market before and after the failure of Lehman Brothers," BIS Working Papers 285, Bank for International Settlements.
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Cited by:
  1. Nellie Zhang, 2012. "Estimating the Demand for Settlement Balances in the Canadian Large Value Transfer System," Working Papers 12-15, Bank of Canada.
  2. Grahame Johnson & Eric Santor, 2013. "Central Bank Liquidity Provision and Core Funding Markets," RBA Annual Conference Volume, in: Alexandra Heath & Matthew Lilley & Mark Manning (ed.), Liquidity and Funding Markets Reserve Bank of Australia.

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