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Interbank interest rates: Funding liquidity risk and XIBOR basis spreads

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  • Gallitschke, Janek
  • Seifried (née Müller), Stefanie
  • Seifried, Frank Thomas

Abstract

This article presents a theoretical model for interbank money market (XIBOR) rates that endogenously generates the basis spreads that characterize post-crisis fixed income markets: XIBOR-OIS spreads, tenor basis spreads, and the forward basis. Our approach is based on an explicit modeling of interbank cash transactions where interbank credit and liquidity risk are factored in. The framework of this article offers a consistent, arbitrage-free explanation for the emergence of basis spreads. We also demonstrate that funding liquidity is a key determinant of post-crisis XIBOR rates and, in particular, tenor basis spreads.

Suggested Citation

  • Gallitschke, Janek & Seifried (née Müller), Stefanie & Seifried, Frank Thomas, 2017. "Interbank interest rates: Funding liquidity risk and XIBOR basis spreads," Journal of Banking & Finance, Elsevier, vol. 78(C), pages 142-152.
    • Handle: RePEc:eee:jbfina:v:78:y:2017:i:c:p:142-152
    DOI: 10.1016/j.jbankfin.2017.01.002
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    Cited by:

    1. Claudio Fontana & Simone Pavarana & Wolfgang J. Runggaldier, 2023. "A stochastic control perspective on term structure models with roll-over risk," Finance and Stochastics, Springer, vol. 27(4), pages 903-932, October.
    2. Karolina Puławska, 2022. "Effects of the bank levy introduction on the interbank market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 844-864, January.
    3. David Skovmand & Jacob Bjerre Skov, 2022. "Decomposing LIBOR in Transition: Evidence from the Futures Markets," Papers 2201.06930, arXiv.org, revised Mar 2022.
    4. Lartey, Theophilus & James, Gregory A. & Danso, Albert, 2021. "Interbank funding, bank risk exposure and performance in the UK: A three-stage network DEA approach," International Review of Financial Analysis, Elsevier, vol. 75(C).
    5. Aneta Hryckiewicz & Piotr Mielus & Karolina Skorulska & Malgorzata Snarska, 2018. "Does a bank levy increase frictions on the interbank market?," KAE Working Papers 2018-033, Warsaw School of Economics, Collegium of Economic Analysis.
    6. Claudio Fontana & Simone Pavarana & Wolfgang J. Runggaldier, 2023. "A stochastic control perspective on term structure models with roll-over risk," Papers 2304.04453, arXiv.org, revised Oct 2023.
    7. Eric Jondeau & Benoit Mojon & Jean-Guillaume Sahuc, 2020. "Bank Funding Cost and Liquidity Supply Regimes," BIS Working Papers 854, Bank for International Settlements.

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