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The 2007-? financial crisis: a euro area money market perspective

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  • Nuno Cassola
  • Claudio Morana

Abstract

Motivated by the “shocking” evidence of non-stationary behavior of money market spreads during the crisis, we investigate the economic and statistical features of money market turbulence by means of a Fractionally Integrated Heteroskedastic Factor Vector Autoregressive model. This approach allows for an accurate modelling of the persistence properties of the data, and to decompose the EURIBOR-OIS spreads into three components bearing an economic interpretation. We find that the increasing trend in the spreads after August 2007 was broken and reversed in December 2008. This coincides with the timing of a large ECB policy rate cut which, together with other policy measures, paved the way for a gradual reversal in market sentiment, and reduction in credit and liquidity risks. Key words: money market interest rates, credit/liquidity risk, fractionally integrated heteroskedastic factor vector autoregressive model.

Suggested Citation

  • Nuno Cassola & Claudio Morana, 2010. "The 2007-? financial crisis: a euro area money market perspective," ICER Working Papers - Applied Mathematics Series 35-2010, ICER - International Centre for Economic Research.
  • Handle: RePEc:icr:wpmath:35-2010
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    References listed on IDEAS

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    More about this item

    Keywords

    money market interest rates; credit/liquidity risk; fractionally integrated heteroskedastic factor vector autoregressive model.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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