Understanding Liquidity and Credit Risks in the Financial Crisis
This paper develops a structured dynamic factor model for the spreads between London Interbank Offered Rate (LIBOR) and overnight index swap (OIS) rates for a panel of banks. Our model involves latent factors which reflect liquidity and credit risk. Our empirical results show that surges in the short term LIBOR-OIS spreads during the 2007-2009 fi nancial crisis were largely driven by liquidity risk. However, credit risk played a more signi cant role in the longer term (twelve-month) LIBOR-OIS spread. The liquidity risk factors are more volatile than the credit risk factor. Most of the familiar events in the fi nancial crisis are linked more to movements in liquidity risk than credit risk.
|Date of creation:||Jan 2010|
|Date of revision:|
|Contact details of provider:|| Postal: Via Patara, 3, 47921 Rimini (RN)|
Web page: http://www.rcfea.org
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:rim:rimwps:45_10. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dimitrios Vortelinos)
If references are entirely missing, you can add them using this form.