Credit and Liquidity in Interbank Rates: A Quadratic Approach
57 Pages Posted: 28 Sep 2013 Last revised: 19 Mar 2016
Date Written: January 1, 2016
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: Suggested Citation