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Funding liquidity, market liquidity and TED spread : A two-regime model

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Author Info

  • Kris Boudt

    ()
    (Vrije Universiteit Brussel
    V.U. University Amsterdam)

  • Ellen C.S. Paulus

    ()
    (London Business School)

  • Dale W.R. Rosenthal

    ()
    (University of Illinois at Chicago)

Abstract

We investigate the effect of market liquidity on equity-collateralized funding accounting for endogeneity. Theory suggests market liquidity can affect funding liquidity in stabilizing and destabilizing manners. Using the average fee on stock loans as a proxy for equity-collateralized funding liquidity, we confirm the existence of these two regimes over the period of July 2006 – May 2011. Furthermore, we show that we can separate the two regimes using the yield spread of Eurodollars over T-bills (TED spread) and that a regime switch seems to occur near a TED spread of 48 basis points.

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File URL: http://www.nbb.be/doc/oc/repec/reswpp/wp244En.pdf
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Bibliographic Info

Paper provided by National Bank of Belgium in its series Working Paper Research with number 244.

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Length: 40 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:nbb:reswpp:201311-244

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Keywords: equity-collateralized funding liquidity; market liquidity; two-regime model; financial distress;

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Cited by:
  1. Dudek, Jérémy, 2013. "Illiquidité, contagion et risque systémique," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/13236 edited by Le Fol, Gaëlle.

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