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The term structure of interbank risk

  • Filipović, Damir
  • Trolle, Anders B.
Registered author(s):

    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.

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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 109 (2013)
    Issue (Month): 3 ()
    Pages: 707-733

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    Handle: RePEc:eee:jfinec:v:109:y:2013:i:3:p:707-733
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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