Market-specific and Currency-specific Risk During the Global Financial Crisis: Evidence from the Interbank Markets in Tokyo and London
AbstractThis paper explores how international money markets reflected credit and liquidity risks during the global financial crisis. After matching the currency denomination, we investigate how the Tokyo Interbank Offered Rate (TIBOR) was synchronized with the London Interbank Offered Rate (LIBOR) denominated in the US dollar and the Japanese yen. Regardless of the currency denomination, TIBOR was highly synchronized with LIBOR in tranquil periods. However, the interbank rates showed substantial deviations in turbulent periods. We find remarkable asymmetric responses in reflecting market-specific and currency-specific risks during the crisis. The regression results suggest that counter-party credit risk increased the difference across the markets, while liquidity risk caused the difference across the currency denominations. They also support the view that a shortage of US dollar as liquidity distorted the international money markets during the crisis. We find that coordinated central bank liquidity provisions were useful in reducing liquidity risk in the US dollar transactions. But their effectiveness was asymmetric across the markets.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16962.
Date of creation: Apr 2011
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Other versions of this item:
- Shin-ichi Fukuda, 2010. "Market-specific and Currency-specific Risk during the Global Financial Crisis: Evidence from the Interbank Markets in Tokyo and London," CARF F-Series CARF-F-229, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
- Shin-ichi Fukuda, 2010. "Market-specific and Currency-specific Risk during the Global Financial Crisis: Evidence from the Interbank Markets in Tokyo and London," CIRJE F-Series CIRJE-F-759, CIRJE, Faculty of Economics, University of Tokyo.
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-04-23 (All new papers)
- NEP-BAN-2011-04-23 (Banking)
- NEP-CBA-2011-04-23 (Central Banking)
- NEP-IFN-2011-04-23 (International Finance)
- NEP-MAC-2011-04-23 (Macroeconomics)
- NEP-MON-2011-04-23 (Monetary Economics)
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