Euro Money Market Spreads During the 2007-? Financial Crisis

Posted: 12 May 2010 Last revised: 9 Jun 2013

See all articles by Nuno Cassola

Nuno Cassola

University of Milan Bicocca - CefES; University of Lisbon - CEMAPRE

Claudio Morana

Università di Milano Bicocca; Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES); Center for Economic Research on Pensions and Welfare Policies (CeRP); University of Bologna - Rimini Center for Economic Analysis (RCEA)

Date Written: October 1, 2011

Abstract

In the paper we investigate the empirical features of euro area money market turbulence during the recent financial crisis. By means of a novel Fractionally Integrated Heteroskedastic Factor Vector Autoregressive model, we find evidence of a deterministic level factor in the EURIBOR-OIS (OIS) spreads term structure, associated with the two waves of stress in the interbank market, following the BNP Paribas (9 August 2007) and Lehman Brothers (16 September 2008) "shocks", and two additional factors, of the long memory type, bearing the interpretation of curvature and slope factors, respectively. The unfolding of the crisis yield a significant increase in their persistence and volatility. We also find evidence of a declining trend in the level and volatility of OIS spreads since December 2008, associated with ECB liquidity policies.

Keywords: money market interest rates, euro area, sub-prime credit crisis, credit risk, liquidity risk, long memory, structural change, fractionally integrated heteroskedastic factor vector autoregressive model

JEL Classification: C32, E43, E50, E58, G15

Suggested Citation

Cassola, Nuno and Morana, Claudio, Euro Money Market Spreads During the 2007-? Financial Crisis (October 1, 2011). Journal of Empirical Finance, 2012, 19, 548-557., Available at SSRN: https://ssrn.com/abstract=1604694 or http://dx.doi.org/10.2139/ssrn.1604694

Nuno Cassola

University of Milan Bicocca - CefES ( email )

Milan
Italy

University of Lisbon - CEMAPRE ( email )

Lisbon
Portugal

Claudio Morana (Contact Author)

Università di Milano Bicocca ( email )

Dip Economia Metodi Quantitativi Strategie Impresa
Piazza dell'Ateneno Nuovo 1
Milano, 20126
Italy
+39 0264483091 (Phone)

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES) ( email )

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

Center for Economic Research on Pensions and Welfare Policies (CeRP) ( email )

Moncalieri, Turin
Italy

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

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