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

National Bank of Belgium Working Paper No. 244

40 Pages Posted: 19 Nov 2013  

Kris Boudt

Vrije Universiteit Brussel (VUB); VU University Amsterdam

Ellen C. S. Paulus

London Business School - Department of Finance

Dale W. R. Rosenthal

University of Illinois at Chicago - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: November 2013

Abstract

We investigate 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 the average fee on stock loans as a proxy for equity-collateralized funding liquidity, we confirm the existence of these two regimes over the period of July 2006-May 2011. Furthermore, 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 seems to occur near a TED spread of 48 basis points.

Keywords: equity-collateralized funding liquidity; market liquidity; two-regime model; financial distress

JEL Classification: EF, 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 (November 2013). National Bank of Belgium Working Paper No. 244. Available at SSRN: https://ssrn.com/abstract=2356236 or http://dx.doi.org/10.2139/ssrn.2356236

Kris Boudt (Contact Author)

Vrije Universiteit Brussel (VUB) ( email )

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

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Ellen C. S. Paulus

London Business School - Department of Finance ( email )

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

Dale W. R. Rosenthal

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

HOME PAGE: http://tigger.uic.edu/~daler

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