Journal Press India^®

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The paper looks into the role of the various durable and transitory liquidity shocks on the Indian call money spread for the period May 2011 to May 2022 using weekly data. Durable shocks comprise of both structural and policy-induced shocks. Transitory shocks are frictional drivers of liquidity. The methodologies used in the study are OLS, GARCH, and EGARCH models. The results from the modified OLS estimation (after correcting for autocorrelation and heteroscedasticity) show that the spread is affected by all the relevant variables considered in the estimation. However, as the estimates are not free from ARCH effects, we have re-estimated the model using GARCH. Here all the relevant variables except open market operations and one dummy are found to be significant. Lastly, we have estimated the model using the EGARCH methodology. This shows the presence of asymmetries in the model, that is, negative shocks have a larger effect on the volatility than positive shocks.

Keywords

Spread, Transitory Shocks, Durable shocks

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