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A Black Swan
.Stanford UniversityJohn C. WilliamsFederal Reserve Bank of San FranciscoBank of Canada Conference on Fixed Income MarketsSeptember 12-13, 2008
The views expressed in this paper are solely those of the authors and should notbe interpreted as reflecting the views of the management of the Federal ReserveBank of San Francisco or the Board of Governors of the Federal Reserve System.
 
Turmoil in Money Markets
On August 9, 2007,money markets
6.0Percent
,with overnight ratesswinging away from
4.0.Effective Federal Funds
r rand longer-termmoney market rates
2.03.0arget eera uns3-Month LIBOR
rising sharply.
1.0Sep 06Feb 07Jul 07Dec 07May 08
 
A Black Swan in the Money Market
,spreads on 3-monthinter-bank loans (relativeto OIS) averaged 8 bp.
1.01.2Percent
wt a o p.
Beginning on August 9,
0.60.83-Month LIBOR OIS Spread
spreas so up.
In the year since then,
0.00.20.4
- -spread has averaged67 bp., with a SD of 17 bp.
-0.22002200320042005200620072008
 
Libor: London inter-bank offer rate.OIS: Overnight indexed swap (proxy for average expected overnight rate)
of 00

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