Financial Stress and Equilibrium Dynamics in Money Markets

Zeynep Senyuz and Emre Yoldas

No 2015-91, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Interest rate spreads are widely-used indicators of funding pressures and market functioning in money markets. Using weekly data from 2002 to 2015, we analyze money market dynamics in a long-run equilibrium framework where commonly-monitored spreads serve as error correction terms. We find strong evidence for nonlinearities with respect to levels of the spreads. We provide point and interval estimates for spread thresholds that quantify funding pressure points from a long-run perspective. Our results indicate significant asymmetry in the adjustment toward long-run equilibrium. We show that economically and statistically significant adjustments occur only following large shocks to risk premia. Additionally, we quantify shifts in interest rate volatilities in high spread regimes characterized by elevated funding stress as well as declining correlations between risky funding rates and relatively safe base rates in such environments.

Keywords: Money markets; Cointegration; Threshold models; GARCH; Constant conditional correlation model. (search for similar items in EconPapers)
JEL-codes: C32 E44 E52 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2015-08-27
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (4)

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http://dx.doi.org/10.17016/FEDS.2015.091 http://dx.doi.org/10.17016/FEDS.2015.091 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2015-91

DOI: 10.17016/FEDS.2015.091

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