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Funding liquidity, market liquidity and TED spread: A two-regime model

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  • Boudt, Kris
  • Paulus, Ellen C.S.
  • Rosenthal, Dale W.R.

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.

Suggested Citation

  • Boudt, Kris & Paulus, Ellen C.S. & Rosenthal, Dale W.R., 2017. "Funding liquidity, market liquidity and TED spread: A two-regime model," Journal of Empirical Finance, Elsevier, vol. 43(C), pages 143-158.
    • Handle: RePEc:eee:empfin:v:43:y:2017:i:c:p:143-158
    DOI: 10.1016/j.jempfin.2017.06.002
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    More about this item

    Keywords

    Equity-collateralized funding liquidity; Market liquidity; Two-regime model; Financial distress;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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