The Term Structure of Interbank Risk
AbstractWe use the term structure of spreads between rates on interest rate swaps indexed to LIBOR and overnight indexed swaps to infer a term structure of interbank risk. We develop a dynamic term structure model with default risk in the interbank market that, in conjunction with information from the credit default swap market, allows us to decompose the term structure of interbank risk into default and non-default components. On average, from August 2007 to January 2011, the fraction of total interbank risk due to default risk increases with maturity. At the short end of the term structure, the non-default component is important in the first half of the sample and is correlated with various measures of market-wide liquidity. Further out the term structure, the default component is the dominant driver of interbank risk throughout the sample period. These results hold true in both the USD and EUR markets and are robust to different model parameterizations and measures of interbank default risk. The analysis has implications for monetary and regulatory policy as well as for pricing, hedging, and risk-management in the interest rate swap market.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 11-34.
Length: 70 pages
Date of creation:
Date of revision:
interbank risk; swap market; default risk; liquidity;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marilyn Barja).
If references are entirely missing, you can add them using this form.