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A model of liquidity hoarding and term premia in inter-bank markets
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Acharya, Viral V. and Skeie, David (2011) A model of liquidity hoarding and term premia in inter-bank markets. Journal of Monetary Economics, 58 (5). pp. 436-447. doi:10.1016/j.jmoneco.2011.05.006 ISSN 0304-3932.
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Official URL: http://dx.doi.org/10.1016/j.jmoneco.2011.05.006
Abstract
Financial crises are associated with reduced volumes and extreme levels of rates for term inter-bank loans, reflected in one-month and three-month LIBOR. We explain such stress by modeling leveraged banks' precautionary demand for liquidity. Asset shocks impair a bank's ability to roll over debt because of agency problems associated with high leverage. In turn, banks hoard liquidity and decrease term lending as their rollover risk increases over the term of the loan. High levels of short-term leverage and illiquidity of assets lead to low volumes and high rates for term borrowing. In extremis, inter-bank markets can completely freeze.
Item Type: | Journal Article | ||||||
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Divisions: | Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
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Journal or Publication Title: | Journal of Monetary Economics | ||||||
Publisher: | Elsevier | ||||||
ISSN: | 0304-3932 | ||||||
Official Date: | July 2011 | ||||||
Dates: |
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Volume: | 58 | ||||||
Number: | 5 | ||||||
Page Range: | pp. 436-447 | ||||||
DOI: | 10.1016/j.jmoneco.2011.05.006 | ||||||
Status: | Peer Reviewed | ||||||
Publication Status: | Published | ||||||
Access rights to Published version: | Restricted or Subscription Access |
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