The impact of a new term auction facility on Libor–OIS spreads and volatility transmission between money and mortgage markets during the subprime crisis
During the subprime crisis, the U.S. Federal Reserve was concerned about widening spreads between overnight interbank lending rates such as the overnight index swap (OIS) and term London Interbank Offer Rate (Libor). Among the tools it used to counter the impact of the crisis, the innovative term auction facility (TAF) attracted much attention. We investigate the impact of the TAF on the Libor–OIS spread. We find that the TAF has clear initial and sustained expectation effects on the three-month Libor–OIS spread, but no real initial or short-term funding effects, which casts doubt on the usefulness of the TAF in reducing risk spreads. Since the subprime crisis also spilled across the interbank, commercial paper, and jumbo mortgage markets, we further examine the lead–lag relation between Libor–OIS, commercial paper, and jumbo spreads and the volatility transmission effects between them. For the period before the crisis, we find that the three markets behave largely independently. For the subprime crisis period, however, we find multidirectional lead–lag relations and one-way volatility transmission between these markets.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- In, Francis, 2007. "Volatility spillovers across international swap markets: The US, Japan, and the UK," Journal of International Money and Finance, Elsevier, vol. 26(3), pages 329-341, April.
- John Taylor & John Williams, 2008. "Further Results on a Black Swan in the Money Market," Discussion Papers 07-046, Stanford Institute for Economic Policy Research.
- John C. Williams & John B. Taylor, 2009.
"A Black Swan in the Money Market,"
American Economic Journal: Macroeconomics,
American Economic Association, vol. 1(1), pages 58-83, January.
- 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.
- Tao Wu, 2008. "On the effectiveness of the Federal Reserve's new liquidity facilities," Working Papers 0808, Federal Reserve Bank of Dallas.
When requesting a correction, please mention this item's handle: RePEc:eee:jimfin:v:31:y:2012:i:5:p:1106-1125. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.