This paper provides evidence that central bank interventions had a statistically significant impact on easing stress in unsecured interbank markets during the first phase of the subprime crisis which began in July 2007. Extraordinary liquidity provisions, such as the Term Auction Facility by the Federal Reserve, are analyzed. First a decomposition of the Libor-OIS spread indicates that credit premia increased in importance as the crisis deepened. Second, using Markov switching models, central bank operations are then graphically associated with reductions in term funding stress. Finally, bivariate VAR and GARCH models are adopted to econometrically quantified these impacts. While helpful in compressing Libor spreads, the economic magnitudes of central interventions have overall not been very large.the projected benchmark allotment is defined as the amount of funding required to allow all counterparties to fulfill their respective commitments. ... presence of asymmetric information and limited confidence by market participants with regard to the health of financial institutions. ... EMPIRICAL ANALYSIS Decomposition of the Libor-OIS spread into liquidity and credit components In this first part of the ... Furthermore, it is of interest with regard to motivating future research Contents: III.
|Title||:||The Effectiveness of Central Bank Interventions During the First Phase of the Subprime Crisis|
|Author||:||Heiko Hesse, Nathaniel Frank|
|Publisher||:||International Monetary Fund - 2009-09-01|