Determinants of the EONIA Spread and the Financial Crisis

Authors

  • Carla Soares,

    1. Banco de Portugal
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  • Paulo M. M. Rodrigues

    1. Banco de Portugal
    2. Nova School of Business and Economics and CEFAGE
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    • We are grateful for helpful comments and suggestions from two anonymous referees and Editor Professor Chris Orme, and we also thank Alastair Hall, Denise Osborn, the participants of the Structural Breaks and Monetary Policy conference held at the University of Manchester, and João Sousa, Isabel Marques Gameiro, Dieter Nautz and Gabriel Pérez Quirós. The analyses, opinions and findings of the paper represent the views of the authors, they are not necessarily those of the Banco de Portugal or the Eurosystem.

Abstract

To understand the impact of the 2007–9 financial crisis, we model the Euro overnight interest rate average (EONIA) spread against the main reference rate as an exponential general autoregressive conditional heteroskedastic (EGARCH) model. Before the fixed rate full allotment policy of the European Central Bank (ECB) (period 2004–8), we follow a two regime approach, however afterwards (2008–9), a conventional EGARCH seems more adequate. The results suggest a greater difficulty during the turmoil for the ECB to steer the EONIA spread. The liquidity policy and in particular the provision of long-term liquidity was effective in reducing market volatility.

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