The Impact of Subprime Mortgage Crisis on Cross-Currency Linkage of LIBOR-OIS Spreads

42 Pages Posted: 27 Aug 2009 Last revised: 25 Apr 2011

See all articles by Philip Ji

Philip Ji

Monash University - Department of Accounting; Financial Research Network (FIRN)

Francis Haeuck In

Monash University - Department of Accounting; Financial Research Network (FIRN)

Date Written: May 21, 2009

Abstract

This paper examines the cross-currency linkage of LIBOR-OIS spreads. We consider daily spread data in five major currencies for the period of March 1, 2006 to Nov 11, 2008. The impulse response analysis is conducted in a multivariate setting, adopting the bias-corrected bootstrap as a means of statistical inference. The overall evidence suggests that the crisis has substantially changed the nature of the cross-country interactions in liquidity premium. Global money markets fail to contain the US dollar term funding shocks and the role of Japanese yen in terms of liquidity source appears to be significant. Also the US dollar and yen spreads drive the cross-currency system of liquidity premium, whereas the premium in the euro, pound and Australian dollar funding equilibrate to errors in long-run relation of liquidity premium.

Keywords: Subprime mortgage crisis, LIBOR-OIS spreads, Vector autoregressive model, Cointegration, Vector error correction

JEL Classification: G15, C32

Suggested Citation

Ji, Philip Inyeob and In, Francis Haeuck, The Impact of Subprime Mortgage Crisis on Cross-Currency Linkage of LIBOR-OIS Spreads (May 21, 2009). 22nd Australasian Finance and Banking Conference 2009. Available at SSRN: https://ssrn.com/abstract=1407925 or http://dx.doi.org/10.2139/ssrn.1407925

Philip Inyeob Ji (Contact Author)

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Francis Haeuck In

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia
+61 3 9905 1561 (Phone)
+61 3 9905 5475 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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