The Effect of Substitute Assets on Yields in Financial Markets |
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| Authors: | Ken B Cyree James T Lindley Drew B Winters |
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| Institution: | Ken B. Cyree is Frank R. Day/Mississippi Bankers Chair at The University of Mississippi in University, MS, James T. Lindley is Professor at the University of Southern Mississippi in Hattiesburg, MS, and Drew B. Winters is Jerry S. Rawls Professor at Texas Tech University in Lubbock, TX and The Federal Reserve Bank of St. Louis in St. Louis, MO |
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| Abstract: | 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. |
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