Abstract

http://ssrn.com/abstract=1923696
 
 

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The Term Structure of Interbank Risk


Damir Filipovic


Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Anders B. Trolle


Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

October 25, 2012

Swiss Finance Institute Research Paper No. 11-34

Abstract:     
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.

Number of Pages in PDF File: 98

Keywords: Interbank risk, LIBOR, Swap market, Default risk, Liquidity

JEL Classification: E43, G01, G12

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Date posted: September 8, 2011 ; Last revised: May 15, 2013

Suggested Citation

Filipovic, Damir and Trolle, Anders B., The Term Structure of Interbank Risk (October 25, 2012). Swiss Finance Institute Research Paper No. 11-34. Available at SSRN: http://ssrn.com/abstract=1923696 or http://dx.doi.org/10.2139/ssrn.1923696

Contact Information

Damir Filipovic
Ecole Polytechnique Fédérale de Lausanne ( email )
Odyssea
Station 5
Lausanne, 1015
Switzerland
HOME PAGE: http://people.epfl.ch/damir.filipovic
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland
Anders B. Trolle (Contact Author)
Ecole Polytechnique Fédérale de Lausanne ( email )
Quartier UNIL-Dorigny
Extranef 216
Lausanne, 1015
Switzerland
Swiss Finance Institute
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland
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