Determinants of the EONIA spread and the financial crisis

Carla Soares and Paulo Rodrigues

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: The financial markets turmoil of 2007-09 impacted on the overnight segment, which is the first step of monetary policy implementation. We model the volatility of the EONIA spread as an EGARCH. However, the nature of the EGARCH considered will be different in the period before the fixed rate full allotment policy of the ECB (2004 - 2008) where we follow the approach of Hamilton (1996) and in the period afterwards (2008 - 2009) where a conventional EGARCH seems sufficient to capture the behaviour of volatility. The results suggest a greater difficulty during the turmoil for the ECB to steer the level of the EONIA spread relative to the main reference rate. The liquidity effect has been reduced since 2007 and in particular since the full allotment policy at the refinancing operations. On the other hand, the liquidity policy and especially the provision of long-term liquidity followed was effective in reducing market volatility. Liquidity provision conditions were also found to have influenced the EONIA spread only since the financial market turmoil. Fine-tuning operations contributed to stabilize money market conditions, especially during the turmoil. The EGARCH parameter estimates also suggest a structural change in the behaviour of the EONIA spread in reaction to shocks.

JEL-codes: E43 E52 G21 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Journal Article: Determinants of the EONIA Spread and the Financial Crisis (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w201112

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