How to Stop a Herd of Running Bears? Market Response to Policy Initiatives During the Global Financial Crisis

50 Pages Posted: 25 Aug 2009 Last revised: 7 Oct 2009

See all articles by Yacine Ait-Sahalia

Yacine Ait-Sahalia

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Jochen R. Andritzky

German Council of Economic Experts; International Monetary Fund (IMF)

Andreas (Andy) Jobst

International Monetary Fund (IMF) - European Department

Sylwia Barbara Nowak

International Monetary Fund (IMF)

Natalia T. Tamirisa

International Monetary Fund (IMF)

Date Written: September 1, 2009

Abstract

This paper examines the impact of macroeconomic and financial sector policy announcements in the United States, the United Kingdom, the euro area, and Japan during the recent crisis on interbank credit and liquidity risk premia. Announcements of interest rate cuts, liquidity support, liability guarantees, and recapitalization were associated with a reduction of interbank risk premia, albeit to a different degree during the subprime and global phases of the crisis. Decisions not to reduce interest rates and bail out individual banks in an ad hoc manner had adverse repercussions, both domestically and abroad. The results are robust to controlling for the surprise content of announcements and using alternative measures of financial distress.

Keywords: Crisis, policy, announcement, event, financial, liquidity, monetary, fiscal, bank

JEL Classification: G01, G14, G15, G18, E65, E63

Suggested Citation

Ait-Sahalia, Yacine and Andritzky, Jochen and Jobst, Andreas A. and Nowak, Sylwia Barbara and Tamirisa, Natalia T., How to Stop a Herd of Running Bears? Market Response to Policy Initiatives During the Global Financial Crisis (September 1, 2009). International Monetary Fund, WP No. 09/204, 22nd Australasian Finance and Banking Conference 2009, Available at SSRN: https://ssrn.com/abstract=1461222 or http://dx.doi.org/10.2139/ssrn.1461222

Yacine Ait-Sahalia

Princeton University - Department of Economics ( email )

Fisher Hall
Princeton, NJ 08544
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National Bureau of Economic Research (NBER)

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Jochen Andritzky

German Council of Economic Experts ( email )

Federal Statistical Office
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International Monetary Fund (IMF) ( email )

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Andreas A. Jobst

International Monetary Fund (IMF) - European Department ( email )

700 19th Street NW
Washington, DC 20431
United States
+1-202-538-2898 (Phone)

Sylwia Barbara Nowak (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Natalia T. Tamirisa

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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