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Deciphering the Libor and Euribor Spreads during the subprime crisis

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  • Loriana Pelizzon

    ()
    (Department of Economics, University of Venice Cà Foscari)

  • Domenico Sartore

    (Department of Economics, University of Venice Cà Foscari)

Abstract

This paper investigates the key role played by different factors, such as the use of Asset Backed Commercial Paper as collaterals in the short-term debt market, credit risk and the injection of liquidity by Central Banks through so-called unconventional measures, on the persistent spread during the subprime crisis bet. The empirical analysis shows that, in addition to credit risk, a relevant variable for explaining the interbank rate dynamics is the outstanding volume in the Asset Backed Commercial Paper market. In short, the large spread observed in the market is explained by the inter-relationship between collateralized short-term debt markets and the unsecured interbank market. It is also shown that Central Bank "non-conventional" intervention variables are relevant in affecting the spread both in the long-run but mostly in the short-run.

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File URL: http://www.unive.it/media/allegato/DIP/Economia/Working_papers/Working_papers_2013/WP_DSE_pelizzon_sartore_14_13.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2013: 14.

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Length: 32 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:ven:wpaper:2013:14

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Keywords: Subprime Crisis; Collateral Liquidity; Unconventional Monetary Policy.;

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  1. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
  2. Bengt Holmstrom & Jean Tirole, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," Working papers 95-1, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Benbouzid, Nadia & Mallick, Sushanta, 2013. "Determinants of bank credit default swap spreads: The role of the housing sector," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 243-259.
  4. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1994. "The Financial Accelerator and the Flight to Quality," NBER Working Papers 4789, National Bureau of Economic Research, Inc.
  5. Shehzad, Choudhry Tanveer & De Haan, Jakob, 2013. "Was the 2007 crisis really a global banking crisis?," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 113-124.
  6. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
  7. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  8. Gary Gorton, 2009. "The Subprime Panic," European Financial Management, European Financial Management Association, vol. 15(1), pages 10-46.
  9. John B. Taylor & John C. Williams, 2009. "A black swan in the money market," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
  10. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York.
  11. Tao Wu, 2008. "On the effectiveness of the Federal Reserve's new liquidity facilities," Working Papers 0808, Federal Reserve Bank of Dallas.
  12. Tobias Adrian & Hyun Song Shin, 2011. "Financial intermediary balance sheet management," Staff Reports 532, Federal Reserve Bank of New York.
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Cited by:
  1. Chia-Lin Chang & David Allen & Michael McAleer, 2013. "Recent Developments in Financial Economics and Econometrics: An Overview," Documentos del Instituto Complutense de Análisis Económico 2013-03, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
  2. Chia-Lin Chang & David Allen & Michael McAleer, 2013. "Recent Developments in Financial Economics and Econometrics: An Overview," Tinbergen Institute Discussion Papers 13-021/III, Tinbergen Institute.

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