Market Response to Policy Initiatives during the Global Financial Crisis

Abstract

This paper examines the impact of macroeconomic and financial sector policy announcements in the United States, the United Kingdom, the euro area, and Japan during the recent crisis on interbank credit and liquidity risk premia. Announcements of interest rate cuts, liquidity support, liability guarantees, and recapitalization were associated with a reduction of interbank risk premia, albeit to a different degree during the subprime and global phases of the crisis. Decisions not to reduce interest rates and bail out individual banks in an ad hoc manner had adverse repercussions, both domestically and abroad. The results are robust to controlling for the surprise content of announcements and using alternative measures of financial distress.

Short-term options: Clienteles, market segmentation, and event trading

“…Note thatAït-Sahalia et al (2012) find that macroeconomic and financial sector policy announcements in several key economic zones, including the euro area, have significant effects on interbank credit and liquidity risk premia during the recent financial crisis.37 In order to investigate responses over all Euro Zone events, we use the full sample of trade days for Weeklys (0,1,2, . .…”

Macroeconomic imbalances, financial stress and fiscal vulnerability in the euro area before the debt crises: A market view

“…Secondly, other measures of financial distress could be considered, for instance those involving the investors' reaction to policy communications and initiatives. In this respect, an interesting study could consist in testing the approach proposed by Ait-Sahalia et al (2012) by extending the period to the years before the European debt crises. Note: Column 1 reports the name of the indicators and of the aggregate indexes.…”

Efficiency and transparency effects on Eastern European financial markets

“…We use crisis period dummies to check whether our overall results are specific to certain period or capture influences present in data in other periods. To be specific, according to Aït-Sahalia et al (2010, 2012, and Fiordelisi et al (2014) we also focus on two recent crisis periods. To this end we include in models as explanatory variables dummy crisis period as follows: Dummy Crisis 1 (in tables showed as Dummy_Crs1) stands for Subprime crisis and it denotes the period 1st June 2007 -14th September 2008.…”