Do Liquidity or Credit Effects Explain the Behaviour of the BKBM-LIBOR Differential?

48 Pages Posted: 22 Aug 2010

Date Written: August 19, 2010

Abstract

In August 2007 the BKBM-LIBOR differential switched from positive to negative and then widened considerably following the collapse of Lehman brothers in September 2008, before narrowing gradually as the turmoil financial markets subsided. Our structural regression model and decomposition analyses show that changes in liquidity largely explain the changes in the BKBM-LIBOR differential and that credit risk factors only played a minor role. However our analysis also shows that liquidity in the offshore market also prices information regarding counterparty credit risk, suggesting that our initial results could understate the role played by credit risk factors.

Keywords: LIBOR, BKBM, benchmark, financial crisis

JEL Classification: G01, G10, G15

Suggested Citation

Poskitt, Russell and Waller, Bradley, Do Liquidity or Credit Effects Explain the Behaviour of the BKBM-LIBOR Differential? (August 19, 2010). 23rd Australasian Finance and Banking Conference 2010 Paper, Available at SSRN: https://ssrn.com/abstract=1662173 or http://dx.doi.org/10.2139/ssrn.1662173

Bradley Waller

University of Auckland

Private Bag 92019
Auckland Mail Centre
Auckland, 1142
New Zealand

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