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.
- Equity-collateralized funding liquidity
- Financial distress
- Market liquidity
- Two-regime model