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Another look at yield spreads: The role of liquidity

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  • D H Kim
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    Abstract

    Liquidity plays an important role in explaining how banks determine their allocation of funds. This paper examines whether this fact can explain yield spreads and the term structure of interest rates. The paper models banks’ demand for liquidity in a manner similar to that used to study household need for liquidity, namely, by using a cash-in-advance type model. The paper finds that the shadow price of the cash-in-advance constraint plays an important role in determining yield spreads. The empirical part of the paper shows that the expectations hypothesis might be salvaged under the maintained hypothesis concerning the liquidity premium and risk premium.

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    File URL: http://www.socialsciences.manchester.ac.uk/medialibrary/cgbcr/discussionpapers/dpcgbcr4.pdf
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    Bibliographic Info

    Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 04.

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    Length: 40 pages
    Date of creation: 2002
    Date of revision:
    Handle: RePEc:man:cgbcrp:04

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    Related research

    Keywords: yield spread; liquidity; term structure; cash in advance Constraint;

    References

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    Cited by:
    1. Ngwa Edielle, T. H. Jackson & Hevi Kodzo, Dodzi, 2007. "Efficacité technique des banques dans la CEMAC: Approche Data Envelopment Analysis
      [Technical Efficiency of Banks in CEMAC Zone : Data Envelopment Analysis Approach]
      ," MPRA Paper 9462, University Library of Munich, Germany.

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