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Credit and liquidity in interbank rates: A quadratic approach

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  • Dubecq, Simon
  • Monfort, Alain
  • Renne, Jean-Paul
  • Roussellet, Guillaume

Abstract

A bank that lends on the unsecured market requires compensations for facing the default risk of the borrowing bank (credit risk) and the risk associated to its own future funding needs (liquidity risk). In this paper, we propose a quadratic term-structure model of the spreads between unsecured and risk-free interbank rates. Our no-arbitrage econometric framework allows us to decompose the term structure of spreads into credit and liquidity components and to identify risk premia associated with each of these two risks. Our results suggest that, over the period 2012–2013, most of the reduction in interbank spreads comes from a decrease in liquidity-related risk components.

Suggested Citation

  • Dubecq, Simon & Monfort, Alain & Renne, Jean-Paul & Roussellet, Guillaume, 2016. "Credit and liquidity in interbank rates: A quadratic approach," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 29-46.
    • Handle: RePEc:eee:jbfina:v:68:y:2016:i:c:p:29-46
    DOI: 10.1016/j.jbankfin.2016.03.014
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    Cited by:

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    6. Hans Dewachter & Leonardo Iania & Jean-Charles Wijnandts, 2016. "The response of euro area sovereign spreads to the ECB unconventional monetary policies," Working Paper Research 309, National Bank of Belgium.
    7. Cahn, Christophe & Duquerroy, Anne & Mullins, William, 2017. "Unconventional Monetary Policy and Bank Lending Relationships," SocArXiv vgk25, Center for Open Science.
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    More about this item

    Keywords

    Quadratic term-structure model; Liquidity risk; Credit risk; Interbank market; Unconventional monetary policy;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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