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The interbank market risk premium, central bank interventions, and measures of market liquidity

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  • Alexius, Annika
  • Birenstam, Helene
  • Eklund, Johanna

Abstract

When the interbank market risk premium soared during the financial crisis, it created a wedge between interest rates actually paid by private agents and the rapidly falling policy rates. Many central banks attempted to improve the situation by supplying liquidity to the domestic interbank market. This paper studies the Swedish interbank market risk premium using a unique data set on traded volume between banks and between banks and the Riksbank. We find that the main determinants of the Swedish interbank premium are international variables, such as US and EURO area risk premia. International exchange rate volatility and the EURO/USD deviations from CIP also matters, while standard measures of domestic market liquidity and domestic credit risk have insignificant effects. Nonlinear smooth transition (STR) models show that U.S. financial variables are more important in times of a rising U.S. risk premium. Our measure of actual turnover in the interbank market is associated with a significant reduction of the interbank market risk premium, as are credit provisions by the central bank.

Suggested Citation

  • Alexius, Annika & Birenstam, Helene & Eklund, Johanna, 2014. "The interbank market risk premium, central bank interventions, and measures of market liquidity," Journal of International Money and Finance, Elsevier, vol. 48(PA), pages 202-217.
  • Handle: RePEc:eee:jimfin:v:48:y:2014:i:pa:p:202-217
    DOI: 10.1016/j.jimonfin.2014.08.004
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    Cited by:

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    2. Knezevic, David & Krüger, Niclas & Nordström, Martin, 2019. "A Guarantee – Does the Obligee Agree? A Risk Premium Decomposition of Sub-Sovereign Bond Spreads," Working Papers 2019:12, Örebro University, School of Business.
    3. Alexius, Annika & Birenstam, Helene & Eklund, Johanna, 2014. "The interbank market risk premium, central bank interventions, and measures of market liquidity," Journal of International Money and Finance, Elsevier, vol. 48(PA), pages 202-217.
    4. Abankwa, Samuel & Blenman, Lloyd P., 2021. "Measuring liquidity risk effects on carry trades across currencies and regimes," Journal of Multinational Financial Management, Elsevier, vol. 60(C).

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    More about this item

    Keywords

    Interbank market risk premium; Liquidity risk; Credit risk; Credit provisions;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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