Dissecting Interbank Risk

39 Pages Posted: 4 Oct 2016 Last revised: 7 Oct 2016

See all articles by Juan Angel Lafuente

Juan Angel Lafuente

Jaume I University

Nuria Petit

University Complutense of Madrid

Jesús Ruiz

Universidad Complutense de Madrid (UCM)

Pedro Serrano

University Carlos III of Madrid - Department of Business Administration

Date Written: October 4, 2016

Abstract

This paper analyses interbank risk using the information content of basis swap (BS) spreads, floating-to-floating interest rate swaps whose payments are associated with euro deposit rates for alternative tenors. We propose an empirical model to decompose BS quotes into persistent and transitory components. To estimate both unobservable constituents of BS spreads, we solve a signal extraction problem using a particle filter. Our empirical findings show that changes in systemic risk are associated with regime shifts. Shocks to aggregate liquidity are also important for describing persistent changes in BS spreads. Sovereign risk and risk aversion are relevant factors explaining transitory fluctuations.

Keywords: Interbank risk, basis swap, systemic risk, liquidity, particle filter

JEL Classification: G01, G12, G15, G32

Suggested Citation

Lafuente, Juan Angel and Petit, Nuria and Ruiz, Jesús and Serrano, Pedro, Dissecting Interbank Risk (October 4, 2016). Available at SSRN: https://ssrn.com/abstract=2847567 or http://dx.doi.org/10.2139/ssrn.2847567

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

Jesús Ruiz

Universidad Complutense de Madrid (UCM) ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
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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