Determinants of the Multiple-Term Structures from Interbank Rates

41 Pages Posted: 21 Jun 2015

See all articles by Juan Angel Lafuente

Juan Angel Lafuente

Jaume I University

Nuria Petit

University Complutense of Madrid

Pedro Serrano

University Carlos III of Madrid - Department of Business Administration

Date Written: June 19, 2015

Abstract

The classic relationship between deposit rates and interest rate derivatives has been fractured since August 2007. Uncertainty in the interbank money market has increased the risk premia differentials on unsecured deposits rates of different tenors, such as Euribor, leading to a new pricing framework of interest rate derivatives based on multiple curves. This article analyzes the economic determinants of this new multi-curve framework. We employ basis swap (BS) spreads – floating-to-floating interest rate swaps – as instruments for extracting the interest rate curve differentials. Our results show that the multi-curve framework mirrors the standard single-curve setting in terms of level, slope and curvature factors. The level factor captures 90% of the total variation in the curves, and this factor significantly covaries with a proxy for systemic risk. Moreover, the curve residuals are significantly correlated with interbank liquidity. Our empirical findings also show unidirectional causality running from risk (and liquidity) to level (and noise) factors.

Keywords: Basis swap, noise measure, credit risk, liquidity risk, capital arbitrage

JEL Classification: G01, G12, G15, G32

Suggested Citation

Lafuente, Juan Angel and Petit, Nuria and Serrano, Pedro, Determinants of the Multiple-Term Structures from Interbank Rates (June 19, 2015). Available at SSRN: https://ssrn.com/abstract=2620841 or http://dx.doi.org/10.2139/ssrn.2620841

Juan Angel Lafuente

Jaume I University ( email )

Castellon
E-12071 Castello de la Plana, Castellón de la Plana 12071
Spain

Nuria Petit

University Complutense of Madrid ( email )

Avda. de Séneca 2
Madrid, 28040
Spain

Pedro Serrano (Contact Author)

University Carlos III of Madrid - Department of Business Administration ( email )

C/ Madrid, 126
Getafe, Madrid 28903
Spain
+34916248926 (Phone)

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