The term structure of interbank risk
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. (c) 2013 Elsevier B.V. All rights reserved.
10.1.1.572.910.pdf
Postprint
openaccess
1.17 MB
Adobe PDF
beeba3388dc626e52bef42b986d9bc8c