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The Whys of the LOIS: Credit Skew and Funding Rates Volatility

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  • Stéphane Crépey

    (LaMME - Laboratoire de Mathématiques et Modélisation d'Evry - INRA - Institut National de la Recherche Agronomique - UEVE - Université d'Évry-Val-d'Essonne - CNRS - Centre National de la Recherche Scientifique)

  • Raphaël Douady

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique)

Abstract

Since the 2007 subprime crisis, OIS and Libor markets (Eonia and Euribor in the EUR market) diverged suddenly (See Fig.1 and 2). In this note we show how, by optimizing their lending between Libor and OIS markets, banks are led to apply a spread (LOIS) over the OIS rate when lending at Libor.

Suggested Citation

  • Stéphane Crépey & Raphaël Douady, 2013. "The Whys of the LOIS: Credit Skew and Funding Rates Volatility," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01477891, HAL.
    • Handle: RePEc:hal:cesptp:hal-01477891
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    Cited by:

    1. Stéphane Crépey & Rémi Gerboud & Zorana Grbac & Nathalie Ngor, 2013. "Counterparty Risk And Funding: The Four Wings Of The Tva," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 16(02), pages 1-31.

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    Economy; Mathematical Analysis;

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