The impact of a new term auction facility on Libor-OIS spreads and volatility transmission between money and mortgage markets during the subprime crisis

Francis Haeuck In, Jin Cui, Elizabeth Ann Maharaj

Research output: Contribution to journalArticleResearchpeer-review

Abstract

During the subprime crisis, the U.S. Federal Reserve was concerned about widening spreads between overnight interbank lending rates such as the overnight index swap (OIS) and term London Interbank Offer Rate (Libor). Among the tools it used to counter the impact of the crisis, the innovative term auction facility (TAF) attracted much attention. We investigate the impact of the TAF on the Libor-OIS spread. We find that the TAF has clear initial and sustained expectation effects on the three-month Libor-OIS spread, but no real initial or short-term funding effects, which casts doubt on the usefulness of the TAF in reducing risk spreads. Since the subprime crisis also spilled across the interbank, commercial paper, and jumbo mortgage markets, we further examine the lead?lag relation between Libor-OIS, commercial paper, and jumbo spreads and the volatility transmission effects between them. For the period before the crisis, we find that the three markets behave largely independently. For the subprime crisis period, however, we find multidirectional lead-lag relations and one-way volatility transmission between these markets.
Original languageEnglish
Pages (from-to)1106 - 1125
Number of pages20
JournalJournal of International Money and Finance
Volume31
Issue number5
DOIs
Publication statusPublished - 2012

Cite this

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title = "The impact of a new term auction facility on Libor-OIS spreads and volatility transmission between money and mortgage markets during the subprime crisis",
abstract = "During the subprime crisis, the U.S. Federal Reserve was concerned about widening spreads between overnight interbank lending rates such as the overnight index swap (OIS) and term London Interbank Offer Rate (Libor). Among the tools it used to counter the impact of the crisis, the innovative term auction facility (TAF) attracted much attention. We investigate the impact of the TAF on the Libor-OIS spread. We find that the TAF has clear initial and sustained expectation effects on the three-month Libor-OIS spread, but no real initial or short-term funding effects, which casts doubt on the usefulness of the TAF in reducing risk spreads. Since the subprime crisis also spilled across the interbank, commercial paper, and jumbo mortgage markets, we further examine the lead?lag relation between Libor-OIS, commercial paper, and jumbo spreads and the volatility transmission effects between them. For the period before the crisis, we find that the three markets behave largely independently. For the subprime crisis period, however, we find multidirectional lead-lag relations and one-way volatility transmission between these markets.",
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The impact of a new term auction facility on Libor-OIS spreads and volatility transmission between money and mortgage markets during the subprime crisis. / In, Francis Haeuck; Cui, Jin; Maharaj, Elizabeth Ann.

In: Journal of International Money and Finance, Vol. 31, No. 5, 2012, p. 1106 - 1125.

Research output: Contribution to journalArticleResearchpeer-review

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AB - During the subprime crisis, the U.S. Federal Reserve was concerned about widening spreads between overnight interbank lending rates such as the overnight index swap (OIS) and term London Interbank Offer Rate (Libor). Among the tools it used to counter the impact of the crisis, the innovative term auction facility (TAF) attracted much attention. We investigate the impact of the TAF on the Libor-OIS spread. We find that the TAF has clear initial and sustained expectation effects on the three-month Libor-OIS spread, but no real initial or short-term funding effects, which casts doubt on the usefulness of the TAF in reducing risk spreads. Since the subprime crisis also spilled across the interbank, commercial paper, and jumbo mortgage markets, we further examine the lead?lag relation between Libor-OIS, commercial paper, and jumbo spreads and the volatility transmission effects between them. For the period before the crisis, we find that the three markets behave largely independently. For the subprime crisis period, however, we find multidirectional lead-lag relations and one-way volatility transmission between these markets.

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