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The term structure of interbank risk

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  • Filipović, Damir
  • Trolle, Anders B.

Abstract

We infer a term structure of interbank risk from spreads between rates on interest rate swaps indexed to the London Interbank Offered Rate (LIBOR) and overnight indexed swaps. We develop a tractable model of interbank risk to decompose the term structure into default and non-default (liquidity) components. From August 2007 to January 2011, the fraction of total interbank risk due to default risk, on average, increases with maturity. At short maturities, the non-default component is important in the first half of the sample period and is correlated with measures of funding and market liquidity. The model also provides a framework for pricing, hedging, and risk management of interest rate swaps in the presence of significant basis risk.

Suggested Citation

  • Filipović, Damir & Trolle, Anders B., 2013. "The term structure of interbank risk," Journal of Financial Economics, Elsevier, vol. 109(3), pages 707-733.
  • Handle: RePEc:eee:jfinec:v:109:y:2013:i:3:p:707-733
    DOI: 10.1016/j.jfineco.2013.03.014
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    Cited by:

    1. Wolski, Marcin & van de Leur, Michiel, 2016. "Interbank loans, collateral and modern monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 388-416.
    2. Brousseau, Vincent & Nikolaou, Kleopatra & Pill, Huw, 2014. "Modeling Money Market Spreads: What Do We Learn about Refinancing Risk?," Finance and Economics Discussion Series 2014-112, Board of Governors of the Federal Reserve System (U.S.).
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    5. Laura Morino & Wolfgang J. Ruggaldier, 2014. "On multicurve models for the term structure," Papers 1401.5431, arXiv.org.
    6. Christa Cuchiero & Claudio Fontana & Alessandro Gnoatto, 2014. "A general HJM framework for multiple yield curve modeling," Papers 1406.4301, arXiv.org, revised May 2015.
    7. Masaaki Fujii & Akihiko Takahashi, 2015. "Choice of Collateral Currency Updated -A market model for the benchmark pricing-," CARF F-Series CARF-F-371, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    8. Christa Cuchiero & Claudio Fontana & Alessandro Gnoatto, 2016. "A general HJM framework for multiple yield curve modelling," Finance and Stochastics, Springer, vol. 20(2), pages 267-320, April.
    9. Schmidt, Peter S. & Schrimpf, Andreas & von Arx, Urs & Wagner, Alexander F & Ziegler, Andreas, 2015. "Size and Momentum Profitability in International Stock Markets," CEPR Discussion Papers 10804, C.E.P.R. Discussion Papers.
    10. Claudio Morana, 2014. "New insights on the US OIS spreads term structure during the recent financial turmoil," Applied Financial Economics, Taylor & Francis Journals, vol. 24(5), pages 291-317, March.
    11. Minhaj Mahmud & Yasuyuki Sawada, 2015. "Happiness in Life Domains: Evidence from Bangladesh Based on Parametric and Non-Parametric Models," CIRJE F-Series CIRJE-F-987, CIRJE, Faculty of Economics, University of Tokyo.
    12. 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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    14. Jian Luo & Xiaoxia Ye & May Hu, 2016. "Counter-Credit-Risk Yield Spreads: A Puzzle in China's Corporate Bond Market," International Review of Finance, International Review of Finance Ltd., vol. 16(2), pages 203-241, June.
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    16. 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.
    17. 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.
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    21. Cui, Jin & In, Francis & Maharaj, Elizabeth Ann, 2016. "What drives the Libor–OIS spread? Evidence from five major currency Libor–OIS spreads," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 358-375.
    22. Masaaki Fujii & Akihiko Takahashi, 2015. "Choice of Collateral Currency Updated--A market model for the benchmark pricing--," CIRJE F-Series CIRJE-F-988, CIRJE, Faculty of Economics, University of Tokyo.
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    More about this item

    Keywords

    Interbank risk; LIBOR; Interest rate swaps; Default risk; Liquidity;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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