Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/210056
Authors: 
Syrstad, Olav
Year of Publication: 
2014
Series/Report no.: 
Working Paper No. 07/2014
Abstract: 
This paper investigates the effectiveness of the Federal Reserve's Term Auction Facility (TAF) in alleviating the liquidity shortage in USD and reducing the spread between the 3-month Libor rate and the expected policy rate. I construct a proxy for the 3-month liquidity risk premium based on data from the FX forward market which enables me to (i) decompose the Libor spread into a liquidity premium and a credit premium, and (ii) test the effectiveness of the TAF in reducing the liquidity premium in money market spreads. I find that long-term (84-day) TAF auctions were effective in reducing the 3-month liquidity premium. Furthermore, a reduction in the liquidity premium led to a fall in the 3-month Libor spread in USD. Credit risk, however, seems to have been a rather modest factor in explaining the increase in the Libor spread during the financial crisis.
Subjects: 
LIBOR-OIS spread
term auction facility
liquidity premium
credit premium
JEL: 
E41
E43
E51
Persistent Identifier of the first edition: 
ISBN: 
978-82-7553-806-0
Creative Commons License: 
https://creativecommons.org/licenses/by-nc-nd/4.0/deed.no
Document Type: 
Working Paper
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