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.


Published in:
Journal Of Financial Economics, 109, 3, 707-733
Year:
2013
Publisher:
Lausanne, Elsevier
ISSN:
0304-405X
Keywords:
Laboratories:




 Record created 2013-10-01, last modified 2018-01-28

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