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Credit and liquidity in interbank rates: A quadratic approach

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  • Dubecq, Simon
  • Monfort, Alain
  • Renne, Jean-Paul
  • Roussellet, Guillaume

Abstract

A bank that lends on the unsecured market requires compensations for facing the default risk of the borrowing bank (credit risk) and the risk associated to its own future funding needs (liquidity risk). In this paper, we propose a quadratic term-structure model of the spreads between unsecured and risk-free interbank rates. Our no-arbitrage econometric framework allows us to decompose the term structure of spreads into credit and liquidity components and to identify risk premia associated with each of these two risks. Our results suggest that, over the period 2012–2013, most of the reduction in interbank spreads comes from a decrease in liquidity-related risk components.

Suggested Citation

  • Dubecq, Simon & Monfort, Alain & Renne, Jean-Paul & Roussellet, Guillaume, 2016. "Credit and liquidity in interbank rates: A quadratic approach," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 29-46.
  • Handle: RePEc:eee:jbfina:v:68:y:2016:i:c:p:29-46
    DOI: 10.1016/j.jbankfin.2016.03.014
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    Cited by:

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    4. Hans Dewachter & Leonardo Iania & Jean-Charles Wijnandts, 2016. "The response of euro area sovereign spreads to the ECB unconventional monetary policies," Working Paper Research 309, National Bank of Belgium.
    5. Cahn, Christophe & Duquerroy, Anne & Mullins, William, 2017. "Unconventional Monetary Policy and Bank Lending Relationships," SocArXiv vgk25, Center for Open Science.
    6. Dombret, Andreas R. & Foos, Daniel & Pliszka, Kamil & Schulz, Alexander, 2019. "What are the real effects of financial market liquidity? Evidence on bank lending from the euro area," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 62(C), pages 152-183.
    7. Augustin, P. & Chernov, M. & Schmid, L. & Song, D., 2021. "Benchmark interest rates when the government is risky," Journal of Financial Economics, Elsevier, vol. 140(1), pages 74-100.
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    9. Tsuruta, Masaru, 2020. "Decomposing the term structures of local currency sovereign bond yields and sovereign credit default swap spreads," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    10. Gerhart, Christoph & Lütkebohmert, Eva, 2020. "Empirical analysis and forecasting of multiple yield curves," Insurance: Mathematics and Economics, Elsevier, vol. 95(C), pages 59-78.
    11. Monfort, Alain & Renne, Jean-Paul & Roussellet, Guillaume, 2015. "A Quadratic Kalman Filter," Journal of Econometrics, Elsevier, vol. 187(1), pages 43-56.
    12. Alexius, Annika & Birenstam, Helene & Eklund, Johanna, 2014. "The interbank market risk premium, central bank interventions, and measures of market liquidity," Journal of International Money and Finance, Elsevier, vol. 48(PA), pages 202-217.
    13. Marco Casiraghi & Eugenio Gaiotti & Lisa Rodano & Alessandro Secchi, 2016. "ECB Unconventional Monetary Policy and the Italian Economy during the Sovereign Debt Crisis," International Journal of Central Banking, International Journal of Central Banking, vol. 12(2), pages 269-315, June.

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    More about this item

    Keywords

    Quadratic term-structure model; Liquidity risk; Credit risk; Interbank market; Unconventional monetary policy;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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