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Liquidity risk premia in unsecured interbank money markets

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  • Eisenschmidt, Jens
  • Tapking, Jens

Abstract

Unsecured interbank money market rates such as the Euribor increased strongly with the start of the financial market turbulences in August 2007. There is clear evidence that these rates reached levels that cannot be explained alone by higher credit risk. This article presents this evidence and provides a theoretical explanation which refers to the funding liquidity risk of lenders in unsecured term money markets. JEL Classification: G01, G10, G21

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1025.

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Date of creation: Mar 2009
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Handle: RePEc:ecb:ecbwps:20091025

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Keywords: 2007/2008 financial market turmoil; interbank money markets; Liquidity premium; unsecured lending;

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References

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  1. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  2. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
  3. Holmstrom, B & Tirole, J, 1996. "Private and Public Supply of Liquidity," Working papers 96-21, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Haibin Zhu, 2004. "An empirical comparison of credit spreads between the bond market and the credit default swap market," BIS Working Papers 160, Bank for International Settlements.
  5. Carlsson, H. & Damme, E.E.C. van, 1993. "Global games and equilibrium selection," Open Access publications from Tilburg University urn:nbn:nl:ui:12-154416, Tilburg University.
  6. John B. Taylor & John C. Williams, 2008. "A Black Swan in the Money Market," NBER Working Papers 13943, National Bureau of Economic Research, Inc.
  7. Acharya, Viral V & Viswanathan, S, 2008. "Moral Hazard, Collateral and Liquidity," CEPR Discussion Papers 6630, C.E.P.R. Discussion Papers.
  8. Fran├žois-Louis Michaud & Christian Upper, 2008. "What drives interbank rates? Evidence from the Libor panel," BIS Quarterly Review, Bank for International Settlements, March.
  9. Itay Goldstein & Ady Pauzner, 2005. "Demand-Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, 06.
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