33 Pages Posted: 31 Aug 2010 Last revised: 8 Jun 2017
Date Written: June 7, 2017
We study the effect of market liquidity on equity-collateralized funding, accounting for endogeneity. Theory suggests market liquidity can affect funding liquidity in stabilizing and destabilizing manners. Using a new proxy for equity-collateralized funding liquidity of S&P 500 stocks over the period of July 2006-May 2011, we show that we can separate the two regimes using the yield spread of Eurodollars over T-bills (TED spread) and that a regime switch occurs near a TED spread of 48 basis points.
Keywords: Financial distress, funding liquidity, market liquidity, systemic risk, two-regime model
JEL Classification: E44, E51, G01, G18
Suggested Citation: Suggested Citation
Boudt, Kris and Paulus, Ellen C. S. and Rosenthal, Dale W. R., Funding Liquidity, Market Liquidity and TED Spread: A Two-Regime Model (June 7, 2017). Journal of Empirical Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1668635 or http://dx.doi.org/10.2139/ssrn.1668635