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 language | English |
|---|---|
| Pages (from-to) | 143-158 |
| Number of pages | 16 |
| Journal | Journal of Empirical Finance |
| Volume | 43 |
| Early online date | 5 Jul 2017 |
| DOIs | |
| Publication status | Published - Sept 2017 |
Funding
We thank Tobias Adrian, Jef Boeckx, Christophe Croux, Leonardo Iania, Christopher Malloy, Angelo Ranaldo, Stephen Schaefer, Nitish Sinha, Gunther Wuyts, and seminar participants at the London Business School, the 11th Transatlantic Doctoral Conference, the 6th Financial Risks International Forum, the 22nd (EC)2 Conference, the European Central Bank money markets workshop and the 6th Annual Volatility Institute Conference at NYU for helpful suggestions. We also thank Data Explorers for providing us with institutional lending data, and Bill Speth at the CBOE. Financial support from the Dutch National Science Foundation (NWO) and the National Bank of Belgium is gratefully acknowledged.
| Funders | Funder number |
|---|---|
| 6th Financial Risks International Forum | |
| CBOE | |
| National Bank of Belgium | |
| European Commission | |
| European Central Bank | |
| Nederlandse Organisatie voor Wetenschappelijk Onderzoek | |
| London Business School |
Keywords
- Equity-collateralized funding liquidity
- Financial distress
- Market liquidity
- Two-regime model
