Interbank Offered Rate: Effects of the financial crisis on the information content of the fixing
AbstractWith the onset of the financial turmoil in August 2007, pricing references on the money market interest rates have been shocked. The segment of unsecured deposit transactions, which represent the cornerstone of capital markets, and is used as basis for the setting of money market benchmark essential to the indexing of trillions of derivative contracts and loans, has been particularly damaged by the surge in counterparty risk. The lack of confidence between traders and the growing fear of counterparty’s bankruptcies have led progressively to a drying out of the unsecured market turnover. After a relative improvement in early 2008, market activity in the unsecured market has again dried up with the reinforcement of the financial crisis following the collapse of Lehman Brothers. Although there are good reasons to think that the market activity in the cash unsecured segment of the money market has remained distorted, in particular for maturities beyond the very short-term, the OIS-LIBOR spreads have been declining extremely steadily since January 2009, both in major currencies and at various maturities, seemingly pointing to a normalization of the money market. On the basis of a simple econometric supported by statistical evidence applied to the euro area date, this paper analyses whether recent developments in the unsecured interest rates actually support a diagnosis of renewed market activity, and of normalization of the unsecured market.
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Bibliographic InfoPaper provided by IESEG School of Management in its series Working Papers with number 2009-ECO-10.
Length: 36 pages
Date of creation: Dec 2009
Date of revision:
LIBOR; EURIBOR; secured segment; fixings; market distortions; financial crisis.;
Find related papers by JEL classification:
- G01 - Financial Economics - - General - - - Financial Crises
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
- C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-03-06 (All new papers)
- NEP-BAN-2010-03-06 (Banking)
- NEP-EEC-2010-03-06 (European Economics)
- NEP-FMK-2010-03-06 (Financial Markets)
- NEP-IFN-2010-03-06 (International Finance)
- NEP-MON-2010-03-06 (Monetary Economics)
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- Nuno Cassola & Alain Durré & Cornelia Holthausen, 2011. "Implementing monetary policy in the crisis times - the case of the ECB," Chapters, European Central Bank.
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