IDEAS home Printed from https://ideas.repec.org/p/hkg/wpaper/1004.html
   My bibliography  Save this paper

Using Interest Rate Derivative Prices to Estimate LIBOR-OIS Spread Dynamics and Systemic Funding Liquidity Shock Probabilities

Author

Listed:
  • Cho-Hoi Hui

    (Research Department, Hong Kong Monetary Authority)

  • Tsz-Kin Chung

    (Research Department, Hong Kong Monetary Authority)

  • Chi-Fai Lo

    (Physics Department, The Chinese University of Hong Kong)

Abstract

Following the bankruptcy of Lehman Brothers in mid-September 2008, there were severe disruptions in international money markets and banks reportedly faced severe liquidity shocks, in particular US-dollar funding shortages, prompting central banks around the world to adopt unprecedented policy measures to supply funds to the banks. The turbulence also spilled over to the money market in Hong Kong. A better understanding of the forward-looking information content about funding liquidity risk in the prices of interest-rate derivative instruments is therefore necessary to gauge pressures on systemic liquidity. Using the market prices of the US-dollar LIBOR-overnight index swap (OIS) spread, we estimate the probability of the systemic funding liquidity shock during the crisis period, which deviated from zero on 18 September 2008 to 12%. This provided an early warning signal of the systemic liquidity shock on 29 September 2008 when the interbank market was paralysed and the Federal Reserve authorised a US$330 billion expansion of swap lines with other central banks.

Suggested Citation

  • Cho-Hoi Hui & Tsz-Kin Chung & Chi-Fai Lo, 2010. "Using Interest Rate Derivative Prices to Estimate LIBOR-OIS Spread Dynamics and Systemic Funding Liquidity Shock Probabilities," Working Papers 1004, Hong Kong Monetary Authority.
    • Handle: RePEc:hkg:wpaper:1004
    as

    Download full text from publisher

    File URL: http://www.hkma.gov.hk/media/eng/publication-and-research/research/working-papers/HKMAWP10_04_full.pdf
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gefang, Deborah & Koop, Gary & Potter, Simon M., 2011. "Understanding liquidity and credit risks in the financial crisis," Journal of Empirical Finance, Elsevier, vol. 18(5), pages 903-914.
    2. Guillermo Andrés Cangrejo Jiménez, 2014. "La Estructura a Plazos del Riesgo Interbancario," Documentos de Trabajo 12172, Universidad del Rosario.

    More about this item

    Keywords

    Sub-prime crisis; funding liquidity shocks; LIBOR-OIS spread; first-passage-time probability;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hkg:wpaper:1004. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Simon Chan (email available below). General contact details of provider: https://edirc.repec.org/data/magovhk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.