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A Yen is Not a Yen: TIBOR/LIBOR and the Determinants of the Japan Premium

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  • Covrig, Vicentiu
  • Low, Buen Sin
  • Melvin, Michael

Abstract

Pricing in the Euroyen market is based on LIBOR, the London Interbank Offer Rate, set at 11am London time or TIBOR, the Tokyo Interbank Offer Rate, set at 11am Tokyo time. Since the TIBOR panel is dominated by Tokyo city banks while the LIBOR panel is dominated by non-Japanese banks, the changing TIBOR-LIBOR spread reflects the credit risk associated with Japanese banks or the 'Japan premium.' In this paper, we investigate the determinants of this 'Japan premium.' The spread is modeled as a function of determinants of bank default and firm value suggested by a theory of credit spreads. Our results suggest that systematic variation in the spread can be explained by interest rate and stock price effects along with public information flows of good and bad news regarding Japanese banking, with a separate individual role for Japanese bank credit downgrades and upgrades.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 39 (2004)
Issue (Month): 01 (March)
Pages: 193-208

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Handle: RePEc:cup:jfinqa:v:39:y:2004:i:01:p:193-208_00

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Cited by:
  1. Cho-Hoi Hui & Hans Genberg & Tsz-Kin Chung, 2009. "Funding Liquidity Risk and Deviations from Interest-Rate Parity During the Financial Crisis of 2007-2009," Working Papers 0913, Hong Kong Monetary Authority.
  2. Baba, Naohiko & Packer, Frank, 2009. "From turmoil to crisis: Dislocations in the FX swap market before and after the failure of Lehman Brothers," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1350-1374, December.
  3. Shin-ichi Fukuda, 2011. "Market-specific and Currency-specific Risk During the Global Financial Crisis: Evidence from the Interbank Markets in Tokyo and London," NBER Working Papers 16962, National Bureau of Economic Research, Inc.
  4. Shin-ichi Fukuda & Mariko Tanaka, 2013. "Financial Crises and Risk Premiums in International Interbank Markets," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 9(1), pages 117-138, January.
  5. John B. Taylor & John C. Williams, 2008. "A Black Swan in the Money Market," NBER Working Papers 13943, National Bureau of Economic Research, Inc.
  6. Fukuda, Shin-ichi, 2012. "Market-specific and currency-specific risk during the global financial crisis: Evidence from the interbank markets in Tokyo and London," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3185-3196.
  7. Masami Imai, 2006. "Market Discipline and Deposit Insurance Reform in Japan," Wesleyan Economics Working Papers 2006-007, Wesleyan University, Department of Economics.
  8. Imai, Masami, 2006. "Market discipline and deposit insurance reform in Japan," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3433-3452, December.
  9. Naohiko Baba & Masakazu Inada, 2007. "Price Discovery of Credit Spreads for Japanese Mega-Banks: Subordinated Bond and CDS," IMES Discussion Paper Series 07-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
  10. Poskitt, Russell & Waller, Bradley, 2011. "Do liquidity or credit effects explain the behavior of the BKBM-LIBOR differential?," Pacific-Basin Finance Journal, Elsevier, vol. 19(2), pages 173-193, April.
  11. Baba, Naohiko & Packer, Frank, 2009. "Interpreting deviations from covered interest parity during the financial market turmoil of 2007-08," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 1953-1962, November.
  12. Naohiko Baba & Frank Packer, 2009. "From turmoil to crisis: dislocations in the FX swap market before and after the failure of Lehman Brothers," BIS Working Papers 285, Bank for International Settlements.
  13. Naohiko Baba & Frank Packer, 2008. "Interpreting deviations from covered interest parity during the financial market turmoil of 2007-08," BIS Working Papers 267, Bank for International Settlements.

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