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Another look at yield spreads: The role of liquidity

Authors
Kim, Dong Heon
Issue Date
4월-2008
Publisher
UNIV NORTH CAROLINA
Citation
SOUTHERN ECONOMIC JOURNAL, v.74, no.4, pp.952 - 970
Indexed
SCIE
SCOPUS
Journal Title
SOUTHERN ECONOMIC JOURNAL
Volume
74
Number
4
Start Page
952
End Page
970
URI
https://scholar.korea.ac.kr/handle/2021.sw.korea/123830
DOI
10.2307/20112009
ISSN
0038-4038
Abstract
Liquidity plays an important role in explaining how banks determine their allocation of funds. This paper examines whether this fact can explain yield spreads and the term structure of interest rates. The paper models banks' demand for liquidity in a manner similar to that often used to study household liquidity needs, namely, by using a cash-in-advance type model. The paper finds that the cash-in-advance constraint (liquidity constraint) plays an important role in determining yield spreads. The empirical part of the paper shows that the expectations hypothesis might be salvaged when account is taken of the liquidity premium and the risk premium.
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