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Financial stress and equilibrium dynamics in term interbank funding markets

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  • Yoldas, Emre
  • Senyuz, Zeynep

Abstract

Interbank funding markets are central to the functioning of the financial system and the transmission of monetary policy. Libor–OIS spreads have been widely-used indicators of conditions in these markets. We construct models that incorporate the long-run equilibrium relationship between term Libor and OIS rates and their regime-dependent dynamics. We find strong evidence for three regimes in the interbank funding market that resemble different pricing of risk and equilibrium outcomes. We provide point and interval estimates for stress thresholds that may serve as benchmarks for policy makers and market participants in assessing funding conditions. We provide evidence of asymmetric adjustment of rates toward long-run equilibrium, and shed light on the role of different policy measures in the adjustment process.

Suggested Citation

  • Yoldas, Emre & Senyuz, Zeynep, 2018. "Financial stress and equilibrium dynamics in term interbank funding markets," Journal of Financial Stability, Elsevier, vol. 34(C), pages 136-149.
  • Handle: RePEc:eee:finsta:v:34:y:2018:i:c:p:136-149
    DOI: 10.1016/j.jfs.2018.01.002
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    More about this item

    Keywords

    Interbank markets; Libor–OIS spread; Credit risk; Liquidity risk; Cointegration; Threshold models; GARCH; DCC;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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