Funding Liquidity, Market Liquidity and TED Spread: A Two-Regime Model

Kris Boudt, Ellen C. S. Paulus, Dale W. R. Rosenthal
2013 Social Science Research Network  
We investigate 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 the average fee on stock loans as a proxy for equity-collateralized funding liquidity, we confirm the existence of these two regimes over the period of July 2006-May 2011. Furthermore, we show that we can separate the two regimes using the yield spread of Eurodollars over T-bills
more » ... lars over T-bills (TED spread) and that a regime switch seems to occur near a TED spread of 48 basis points.
doi:10.2139/ssrn.2356236 fatcat:myyk4vukpjg3hcmei6s6zj2lwa