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

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

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

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.

Original languageEnglish
Pages (from-to)143-158
Number of pages16
JournalJournal of Empirical Finance
Volume43
Issue numberSeptember
DOIs
Publication statusPublished - 2017

Keywords

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

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