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Crisis Management in Canada: Analyzing Default Risk and Liquidity Demand during Financial Stress†

Crisis Management in Canada: Analyzing Default Risk and Liquidity Demand during Financial Stress† AbstractUsing detailed information from the Canadian interbank payments system and liquidity-providing facilities, we find that despite sustained increases in market-rate spreads, the increase in banks’ willingness to pay for liquidity during the 2008–2009 financial crisis was short-lived. Our study suggests that high-frequency distress indicators based on demand for liquidity offered by central banks can be complementary, and perhaps even superior, to market-based indicators, especially during times and in markets where uncertainty in the economic environment may lead to lack of meaningful information in prices due to absence of trading. (JEL E42, E58, G01, G21, G28, H12) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Microeconomics American Economic Association

Crisis Management in Canada: Analyzing Default Risk and Liquidity Demand during Financial Stress†

Crisis Management in Canada: Analyzing Default Risk and Liquidity Demand during Financial Stress†

American Economic Journal: Microeconomics , Volume 13 (2) – May 1, 2021

Abstract

AbstractUsing detailed information from the Canadian interbank payments system and liquidity-providing facilities, we find that despite sustained increases in market-rate spreads, the increase in banks’ willingness to pay for liquidity during the 2008–2009 financial crisis was short-lived. Our study suggests that high-frequency distress indicators based on demand for liquidity offered by central banks can be complementary, and perhaps even superior, to market-based indicators, especially during times and in markets where uncertainty in the economic environment may lead to lack of meaningful information in prices due to absence of trading. (JEL E42, E58, G01, G21, G28, H12)

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Publisher
American Economic Association
Copyright
Copyright © 2021 © American Economic Association
ISSN
1945-7685
DOI
10.1257/mic.20160287
Publisher site
See Article on Publisher Site

Abstract

AbstractUsing detailed information from the Canadian interbank payments system and liquidity-providing facilities, we find that despite sustained increases in market-rate spreads, the increase in banks’ willingness to pay for liquidity during the 2008–2009 financial crisis was short-lived. Our study suggests that high-frequency distress indicators based on demand for liquidity offered by central banks can be complementary, and perhaps even superior, to market-based indicators, especially during times and in markets where uncertainty in the economic environment may lead to lack of meaningful information in prices due to absence of trading. (JEL E42, E58, G01, G21, G28, H12)

Journal

American Economic Journal: MicroeconomicsAmerican Economic Association

Published: May 1, 2021

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