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Interbank interest rates: Funding liquidity risk and XIBOR basis spreads

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  • Gallitschke, Janek
  • Seifried (née Müller), Stefanie
  • Seifried, Frank Thomas

Abstract

This article presents a theoretical model for interbank money market (XIBOR) rates that endogenously generates the basis spreads that characterize post-crisis fixed income markets: XIBOR-OIS spreads, tenor basis spreads, and the forward basis. Our approach is based on an explicit modeling of interbank cash transactions where interbank credit and liquidity risk are factored in. The framework of this article offers a consistent, arbitrage-free explanation for the emergence of basis spreads. We also demonstrate that funding liquidity is a key determinant of post-crisis XIBOR rates and, in particular, tenor basis spreads.

Suggested Citation

  • Gallitschke, Janek & Seifried (née Müller), Stefanie & Seifried, Frank Thomas, 2017. "Interbank interest rates: Funding liquidity risk and XIBOR basis spreads," Journal of Banking & Finance, Elsevier, vol. 78(C), pages 142-152.
  • Handle: RePEc:eee:jbfina:v:78:y:2017:i:c:p:142-152
    DOI: 10.1016/j.jbankfin.2017.01.002
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    References listed on IDEAS

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    Cited by:

    1. Aneta Hryckiewicz & Piotr Mielus & Karolina Skorulska & Malgorzata Snarska, 2018. "Does a bank levy increase frictions on the interbank market?," Working Papers 2018-033, Warsaw School of Economics, Collegium of Economic Analysis.

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