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The interbank market risk premium, central bank interventions, and measures of market liquidity

  • Alexius, Annika


    (Dept. of Economics, Stockholm University)

  • Birenstam, Helene


    (Department of Statistics, Stockholm University)

  • Eklund, Johanna


    (Sveriges Riksbank)

When the interbank market risk premium soared during the finnancial crisis, it created a wedge between interest rates actually paid by private agents and the rapidly falling policy rates. Many central banks attempted to improve the situation by supplying liquidity to the domestic interbank market. This paper studies the Swedish interbank market risk premium using a unique data set on traded volume between banks and between banks and the Riksbank. We find that the main determinants of the Swedish interbank premium are international variables, such as US and EURO area risk premia. International exchange rate volatility and the EURO/USD deviations from CIP also matters, while standard mesures of domestic market liquidity and domestic credit risk have insignificant effects. Our measure of actual turnover in the interbank market is however associated with a significant reduction of the interbank market risk premium, as are credit provisions by the central bank.

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Paper provided by Stockholm University, Department of Economics in its series Research Papers in Economics with number 2014:2.

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Length: 36 pages
Date of creation: 06 Feb 2014
Date of revision:
Handle: RePEc:hhs:sunrpe:2014_0002
Contact details of provider: Postal: Department of Economics, Stockholm, S-106 91 Stockholm, Sweden
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