Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis
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Schoar_Stressed not frozen.pdf
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548.78 KB
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Author(s)
Afonso, Gara
Kovner, Anna
Schoar, Antoinette
Date Issued
July 2011
Journal
Journal of Finance
Publisher
American Finance Association/Wiley
Citation
Afonso, Gara, Anna Kovner, and Antoinette Schoar. “Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis.” The Journal of Finance 66.4 (2011): 1109–1139. © 2011 The American Finance Association
Version
Author's final manuscript
Abstract
We examine the importance of liquidity hoarding and counterparty risk in the U.S. overnight interbank market during the financial crisis of 2008. Our findings suggest that counterparty risk plays a larger role than does liquidity hoarding: the day after Lehman Brothers’ bankruptcy, loan terms become more sensitive to borrower characteristics. In particular, poorly performing large banks see an increase in spreads of 25 basis points, but are borrowing 1% less, on average. Worse performing banks do not hoard liquidity. While the interbank market does not freeze entirely, it does not seem to expand to meet latent demand.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike 3.0
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DOI of Published Version
https://doi.org/10.1111/j.1540-6261.2011.01670.x
