Understanding Liquidity and Credit Risks in the Financial Crisis
AbstractThis paper develops a structured dynamic factor model for the spreads between London Interbank Offered Rate (LIBOR) and overnight index swap (OIS) rates for a panel of banks. Our model involves latent factors which relect liquidity and credit risk. Our empirical results show that surges in the short term LIBOR-OIS spreads during the 2007-2009 financial crisis were largely driven by liquidity risk. However, credit risk played a more significant role in the longer term (twelve-month) LIBOR-OIS spread. The liquidity risk factors are more volatile than the credit risk factor. Most of the familiar events in the financial crisis are linked more to movements in liquidity risk than credit risk.
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 University of Strathclyde Business School, Department of Economics in its series Working Papers with number 1114.
Length: 27 pages
Date of creation: Apr 2011
Date of revision:
Contact details of provider:
Postal: Sir William Duncan Building, 130 Rottenrow, Glasgow G4 0GE
Phone: +44 (0)141 548 3842
Fax: +44 (0)141 548 4445
Web page: http://www.strath.ac.uk/economics/
More information through EDIRC
LIBOR-OIS spread; factor model; credit default swap; Bayesian;
Other versions of this item:
- 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.
- Gefang, Deborah & Koop, Gary & Potter, Simon M., 2011. "Understanding Liquidity and Credit Risks in the Financial Crisis," SIRE Discussion Papers 2011-26, Scottish Institute for Research in Economics (SIRE).
- Deborah Gefang & Gary Koop & Simon M. Potter, 2010. "Understanding Liquidity and Credit Risks in the Financial Crisis," Working Paper Series 45_10, The Rimini Centre for Economic Analysis.
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-06-11 (All new papers)
- NEP-BAN-2011-06-11 (Banking)
- NEP-CBA-2011-06-11 (Central Banking)
- NEP-FMK-2011-06-11 (Financial Markets)
- NEP-RMG-2011-06-11 (Risk Management)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Muto, Ichiro, 2012. "A Simple Interest Rate Model with Unobserved Components: The Role of the Interbank Reference Rate," MPRA Paper 43220, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kirsty Hall).
If references are entirely missing, you can add them using this form.