Title

The Effect of Substitute Assets On Yields In Financial Markets

Document Type

Article

Publication Date

3-1-2007

Department

Finance, Real Estate, and Business Law

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.

Publication Title

Financial Management

Volume

36

Issue

1

First Page

27

Last Page

47