The year-end price of risk in a market for liquidity

Mark D. Griffiths, Drew B. Winters

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

Abstract

Musto (1997, Journal of Finance 52(4), 1861–1882) identifies a year-end effect in commercial paper (CP) and suggests that the price of risk may increase at the year-end. Griffiths and Winters (2003, Journal of Business, forthcoming) show that the timing of the year-end effect in CP is consistent with a preferred habitat for liquidity. However, Griffiths and Winters use data from only one risk class, so we extend their analysis by using spreads between different risk classes to determine if the price of risk does increase at the year-end. Using daily spreads between two risk classes of 7 day, 15 day, and 30 day non-financial CP, we find that the spread does increase at this time. However, the timing of the spread increases and decreases aligns with expectations consistent with a preferred habitat for liquidity at the year-end. This suggests that when liquidity is tight at the year-end, money market investors increase the price of risk.

Original languageEnglish
Title of host publicationThe World of Risk Management
PublisherWorld Scientific Publishing Co.
Pages169-182
Number of pages14
ISBN (Electronic)9789812700865
ISBN (Print)9812565175, 9789812565174
DOIs
StatePublished - Jan 1 2005

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