The Swedish Money Market Risk Premium - Experiences from the Crisis

Abstract

This paper analyses the extent to which the Swedish money market risk premium has been affected by the current financial turmoil. We also examine the impact of shocks transmitted from the US and European markets in more detail. Our results indicate that the Swedish market has been significantly affected by shocks from the US market, but not from the European market. The findings also reveal that the main driver of the money market risk premium in the first part of the crisis was liquidity risk. However, during the latter part of the crisis, there has been a shift from liquidity risk to credit risk. This has specific policy implications for central banks.