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

Author

Listed:
  • Kris Boudt

    (Vrije Universiteit Brussel
    V.U. University Amsterdam)

  • Ellen C.S. Paulus

    (London Business School)

  • Dale W.R. Rosenthal

    (University of Illinois at Chicago)

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.

Suggested Citation

  • Kris Boudt & Ellen C.S. Paulus & Dale W.R. Rosenthal, 2013. "Funding liquidity, market liquidity and TED spread : A two-regime model," Working Paper Research 244, National Bank of Belgium.
    • Handle: RePEc:nbb:reswpp:201311-244
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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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