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What drives the Libor–OIS spread? Evidence from five major currency Libor–OIS spreads

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  • Cui, Jin
  • In, Francis
  • Maharaj, Elizabeth Ann

Abstract

We investigate the determinants of five major currency Libor–OIS spread changes during the long run and interbank market distress periods. Consistent with recent studies, we find that systemic credit and counterparty risks, market liquidity, and volatility are spread determinants. However, the impact and relevance of these determinants change, depending on the stages of the interbank market crisis. We show that commercial bank leverage and the state of the economy are additional spread drivers. We also discover that the key USD spread is strongly related to banks' risk tolerance levels, capital concerns, and secondary market liquidity during the crisis, even after controlling for other factors.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:reveco:v:45:y:2016:i:c:p:358-375
    DOI: 10.1016/j.iref.2016.04.002
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    1. repec:eee:jmacro:v:55:y:2018:i:c:p:64-76 is not listed on IDEAS

    More about this item

    Keywords

    Libor–OIS spread change determinants; Credit and counterparty risks; Market liquidity and volatility; Banking system leverage; State of the economy; Bank risk fundamentals;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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