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Credit and Liquidity in Interbank Rates: a Quadratic Approach

  • Dubecq, S.
  • Monfort, A.
  • Renne, J-P.
  • Roussellet, G.

We propose a quadratic term-structure model of the EURIBOR-OIS spreads. Contrary to OIS, EURIBOR rates incorporate credit and liquidity risks resulting in compensations for (a) facing default risk of debtors, and (b) possible unexpected funding needs on the lender’s side. Our approach allows us to decompose the whole term structure of spreads into credit- and liquidity-related parts and into an expectation part and risk premiums. Our results shed new light on the effects of unconventional monetary policy carried out in the Eurosystem. In particular, our findings suggest that most of the recent easing in the euro interbank market is liquidity-related.

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Paper provided by Banque de France in its series Working papers with number 446.

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Length: 52 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:bfr:banfra:446
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