We study the information contained in the interaction between unsecured and collateralized money markets. We present a model to capture probabilities of migration between lending segments, and probabilities of liquidity shocks (which move the trading-activity in both markets in the same direction). We apply our model to a novel dataset of European interbank-lending, and we show that useful information is obtained from money market interactions. We report that information captured by our model describes historical macroeconomic and liquidity events in the European banking system, and explains interest rate spreads after controlling for different measures commonly used to characterize money markets. In particular, an increase in 10% of the probability of migration from the Unsecured to Secured Market is associated to a 20% percent increase in the spread between Unsecured and Secured rates.
Alejandro Bernales and Mario di Filippo
Classification JEL : E42, E58, G21, G28
Keywords : Money markets, collateralized lending, unsecured lending, equilibrium model, structural model, systemic risk, liquidity
Updated on: 06/12/2018 10:59