The Price of Risk at Year-End: Evidence from Interbank Lending

Abstract

Risk premia on overnight interbank loans increase by a factor of 13 at year-end. Further, this finding is not consistent with common theories of similar year-end anomalies in other money markets. In particular, seasonal liquidity demands seem to explain only a fraction of the effect. Although evidence of year-end window dressing is found in the interbank market, such activity cannot explain the change in pricing behavior because information about the risk of interbank loans is never publicly disclosed.

JEL Classification: G12, G14, G21