Funding Liquidity, Market Liquidity and TED Spread: A Two-Regime Model

33 Pages Posted: 31 Aug 2010 Last revised: 21 Nov 2017

See all articles by Kris Boudt

Kris Boudt

Ghent University; Vrije Universiteit Brussel; Vrije Universiteit Amsterdam

Ellen C. S. Paulus

London Business School - Department of Finance

Dale W. R. Rosenthal

Parametric/Morgan Stanley; Q36 LLC

Multiple version iconThere are 2 versions of this paper

Date Written: June 7, 2017

Abstract

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

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, 43, 143-158, 2017, Available at SSRN: https://ssrn.com/abstract=1668635 or http://dx.doi.org/10.2139/ssrn.1668635

Kris Boudt

Ghent University ( email )

Sint-Pietersplein 5
Gent, 9000
Belgium

Vrije Universiteit Brussel ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Ellen C. S. Paulus (Contact Author)

London Business School - Department of Finance ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Dale W. R. Rosenthal

Parametric/Morgan Stanley ( email )

125 S Clark Street
17th Floor
Chicago, IL 60603
United States

Q36 LLC ( email )

125 S. Clark St.
17th Floor
Chicago, IL 60603
United States

HOME PAGE: http://www.q36llc.com

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