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Deciphering the Libor and Euribor Spreads during the subprime crisis

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  • Pelizzon, Loriana
  • Sartore, Domenico

Abstract

This paper investigates the key role played by different factors, such as the use of Asset Backed Commercial Paper as collaterals in the short-term debt market, credit risk and the injection of liquidity by Central Banks through so-called unconventional measures, on the persistent spread during the subprime crisis bet. The empirical analysis shows that, in addition to credit risk, a relevant variable for explaining the interbank rate dynamics is the outstanding volume in the Asset Backed Commercial Paper market. In short, the large spread observed in the market is explained by the inter-relationship between collateralized short-term debt markets and the unsecured interbank market. It is also shown that Central Bank “non-conventional” intervention variables are relevant in affecting the spread both in the long-run but mostly in the short-run.

Suggested Citation

  • Pelizzon, Loriana & Sartore, Domenico, 2013. "Deciphering the Libor and Euribor Spreads during the subprime crisis," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 565-585.
  • Handle: RePEc:eee:ecofin:v:26:y:2013:i:c:p:565-585 DOI: 10.1016/j.najef.2013.02.022
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    References listed on IDEAS

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    1. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 418-437, July.
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    Cited by:

    1. Flavin, Thomas J. & Sheenan, Lisa, 2015. "The role of U.S. subprime mortgage-backed assets in propagating the crisis: Contagion or interdependence?," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 167-186.
    2. Chia-Lin Chang & Allen, David & McAleer, Michael, 2013. "Recent developments in financial economics and econometrics: An overview," The North American Journal of Economics and Finance, Elsevier, vol. 26(C), pages 217-226.

    More about this item

    Keywords

    Subprime crisis; Collateral; Liquidity; Unconventional monetary policy;

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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