The Term Structure of Money Market Spreads During the Financial Crisis∗
نویسنده
چکیده
I estimate a no-arbitrage model of the term structure of money market spreads during the financial crisis to attribute movements in spreads to credit and liquidity factors. The model restrictions imply that longer-term spreads are linear, risk-adjusted expectations of future short-term spreads. This linear representation of spreads can be partitioned into two components: one related to time-varying expectations of spreads, and another to time-variation in risk premia. Estimation highlights the importance of time-variation in risk premia. Up to 50% of the variation of spreads is explained by time-varying risk premia, and risk premia have significant predictive power for spreads.
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