Semester

Summer

Date of Graduation

2010

Document Type

Dissertation

Degree Type

PhD

College

Chambers College of Business and Economics

Department

Economics

Committee Chair

Ronald Balvers

Abstract

This dissertation addresses issues related to liquidity and market determination of interest rates. Chapters two and three address the market for overnight loans of federal funds. Deviations of the federal funds rate from its target can be interpreted as demand innovations for federal funds. These demand shocks can be modeled as an unobserved component and estimated using the Kalman filter to identify liquidity effects. The effect of a {dollar}1 billion increase in the average sum of open market operations over a one-week period results in a decrease of the federal funds rate by about 12 basis points. In addition, unexpected shocks identify pressure on the funds rate target and isolate policy-motivated changes of the Fed's funds rate target from those resulting from interest rate smoothing. A metric of accumulated demand pressure derived from the state space model is positively related to the size of open market operations as well as the direction and likelihood of federal funds rate target changes at Federal Open Market Committee meetings. The final chapter relates the effect of U.S. Treasury auctions of notes and bonds to changes in relative discount yields. An event study methodology is employed to test the hypothesis that off-the-run relative yields are insulated from the effects related to the auction calendar. A statistically significant positive increase in relative yields is associated with introduction of additional cashflows at the corresponding and neighboring horizons. An analogous methodology is employed for on-the-run bonds, finding a significant and longer lived negative effect at the benchmark five, ten, and 30-year horizons.

Download

Share

COinS