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The Effect of Substitute Assets on Yields in Financial Markets
Author(s) -
Cyree Ken B.,
Lindley James T.,
Winters Drew B.
Publication year - 2007
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2007.tb00163.x
Subject(s) - market liquidity , proxy (statistics) , yield curve , economics , monetary economics , interest rate , money market , yield (engineering) , financial market , financial economics , business , finance , mathematics , statistics , materials science , metallurgy
We examine the link between volume and liquidity in money markets where there are close substitutes. We find that the size of the market, as a proxy for trading volume, affects yield spreads over T‐bill rates. We examine the bankers acceptances market, when market size declined by half over the decade of the 1990s. Controlling for interest‐rate levels, day‐of‐the‐week, calendar, term structure, credit spread, time‐series, and cross‐equation effects, we find that the substitution effect does not eliminate the impact of market‐size changes on rates, but it does preserve the hierarchy of rates across instruments.