A Yen is Not a Yen: Tibor/Libor and the Determinants of the 'Japan Premium'

31 Pages Posted: 5 Nov 2001

See all articles by Vicentiu Covrig

Vicentiu Covrig

California State University, Northridge - Department of Finance, Financial Planning and Insurance

Buen Sin Low

Nanyang Technological University (NTU) - Division of Banking & Finance

Michael Melvin

University of California, San Diego (UCSD) - Rady School of Management; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: September 2001

Abstract

Pricing in the Euroyen market is based on LIBOR, the London Interbank Offer Rate, set at 11am London time or TIBOR, the Tokyo Interbank Offer Rate, set at 11am Tokyo time. Since the TIBOR panel is dominated by Tokyo city banks while the LIBOR panel is dominated by non-Japanese banks, the changing TIBOR-LIBOR spread reflects the credit risk associated with Japanese banks or the 'Japan premium.' In this paper, we investigate the determinants of this "Japan premium." The spread is modeled as a function of determinants of bank default and firm value suggested by a theory of credit spreads. Our results suggest that systematic variation in the spread can be explained by interest rate and stock price effects along with public information flows of good and bad news regarding Japanese banking, with a separate individual role for Japanese bank credit downgrades and upgrades.

Keywords: Japan premium, TIBOR, LIBOR, Credit risk, Japanese Bank, credit spread, credit downgrades, credit upgrades, Euroyen

Suggested Citation

Covrig, Vicentiu and Low, Buen Sin and Melvin, Michael, A Yen is Not a Yen: Tibor/Libor and the Determinants of the 'Japan Premium' (September 2001). Available at SSRN: https://ssrn.com/abstract=289060 or http://dx.doi.org/10.2139/ssrn.289060

Vicentiu Covrig (Contact Author)

California State University, Northridge - Department of Finance, Financial Planning and Insurance ( email )

Northridge, CA 91330-8379
United States

Buen Sin Low

Nanyang Technological University (NTU) - Division of Banking & Finance ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore

Michael Melvin

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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