The 2007-? financial crisis: a euro area money market perspective

Nuno Cassola () and Claudio Morana

ICER Working Papers - Applied Mathematics Series from ICER - International Centre for Economic Research

Abstract: Motivated by the “shocking” evidence of non-stationary behavior of money market spreads during the crisis, we investigate the economic and statistical features of money market turbulence by means of a Fractionally Integrated Heteroskedastic Factor Vector Autoregressive model. This approach allows for an accurate modelling of the persistence properties of the data, and to decompose the EURIBOR-OIS spreads into three components bearing an economic interpretation. We find that the increasing trend in the spreads after August 2007 was broken and reversed in December 2008. This coincides with the timing of a large ECB policy rate cut which, together with other policy measures, paved the way for a gradual reversal in market sentiment, and reduction in credit and liquidity risks. Key words: money market interest rates, credit/liquidity risk, fractionally integrated heteroskedastic factor vector autoregressive model.

JEL-codes: C32 E43 E58 G15 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2010-12
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Persistent link: https://EconPapers.repec.org/RePEc:icr:wpmath:35-2010

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