Credit and Liquidity in Interbank Rates: A Quadratic Approach

57 Pages Posted: 28 Sep 2013 Last revised: 19 Mar 2016

See all articles by Simon Dubecq

Simon Dubecq

affiliation not provided to SSRN

Alain Monfort

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); National Bureau of Economic Research (NBER); Maastricht University

Jean-Paul Renne

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne)

Guillaume Roussellet

McGill University - Desautels Faculty of Management

Date Written: January 1, 2016

Abstract

In this paper, we propose a quadratic term-structure model of the EURIBOR-OIS spreads. As opposed to OIS, EURIBOR rates incorporate credit and liquidity risks. Indeed, a bank that lends on the unsecured market requires compensations for facing (a) the risk of default of the borrowing bank and (b) the risk of its own possible future funding needs. Our approach allows us to decompose the whole term structure of spreads into credit and liquidity components. Our no-arbitrage econometric framework makes it possible to identify risk premia associated with each of these two risks. Our results shed a new light on the effects of unconventional monetary policy carried out in the Eurosystem. In particular, our findings suggest that most of the recent easing in the euro interbank market comes from a decrease in liquidity-related risk premia.

Keywords: Quadratic term-structure model, liquidity risk, credit risk, interbank market, unconventional monetary policy

JEL Classification: E43, E44, G12, G21

Suggested Citation

Dubecq, Simon and Monfort, Alain and Renne, Jean-Paul and Roussellet, Guillaume, Credit and Liquidity in Interbank Rates: A Quadratic Approach (January 1, 2016). Available at SSRN: https://ssrn.com/abstract=2331959 or http://dx.doi.org/10.2139/ssrn.2331959

Simon Dubecq (Contact Author)

affiliation not provided to SSRN

Alain Monfort

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France
+33 1 4117 6079 (Phone)
+33 1 4117 6046 (Fax)

National Bureau of Economic Research (NBER)

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United States

Maastricht University

P.O. Box 616
Maastricht, 6200MD
Netherlands

Jean-Paul Renne

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

Guillaume Roussellet

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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