Another Look at Yield Spreads: The Role of Liquidity

Dong Heon Kim

Southern Economic Journal, 2008, vol. 74, issue 4, 952-970

Abstract: Liquidity plays an important role in explaining how banks determine their allocation of funds. This paper examines whether this fact can explain yield spreads and the term structure of interest rates. The paper models banks' demand for liquidity in a manner similar to that often used to study household liquidity needs, namely, by using a cash‐in‐advance type model. The paper finds that the cash‐in‐advance constraint (liquidity constraint) plays an important role in determining yield spreads. The empirical part of the paper shows that the expectations hypothesis might be salvaged when account is taken of the liquidity premium and the risk premium.

Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1002/j.2325-8012.2008.tb00875.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:soecon:v:74:y:2008:i:4:p:952-970

Access Statistics for this article

More articles in Southern Economic Journal from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().