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The Information Contained in Money Market Interactions: Unsecured vs. Collateralized Lending

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  • A. Bernales
  • M. di Filippo

Abstract

We study the information contained in the interaction between unsecured and collateralized money markets. We present a model to capture probabilities of migration between lending segments, and probabilities of liquidity shocks (which move the trading-activity in both markets in the same direction). We apply our model to a novel dataset of European interbank-lending, and we show that useful information is obtained from money market interactions. We report that information captured by our model describes historical macroeconomic and liquidity events in the European banking system, and explains interest rate spreads after controlling for different measures commonly used to characterize money markets. In particular, an increase in 10% of the probability of migration from the Unsecured to Secured Market is associated to a 20% percent increase in the spread between Unsecured and Secured rates.

Suggested Citation

  • A. Bernales & M. di Filippo, 2016. "The Information Contained in Money Market Interactions: Unsecured vs. Collateralized Lending," Working papers 598, Banque de France.
    • Handle: RePEc:bfr:banfra:598
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    More about this item

    Keywords

    Money markets; collateralized lending; unsecured lending; equilibrium model; structural model; systemic risk; liquidity.;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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