Interbank Offered Rate: Effects of the financial crisis on the information content of the fixing

Vincent Brousseau, Alexandre Chailloux and Alain Durré ()
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Vincent Brousseau: IESEG School of Management
Alexandre Chailloux: International Monetary Fund

No 2009-ECO-10, Working Papers from IESEG School of Management

Abstract: With the onset of the financial turmoil in August 2007, pricing references on the money market interest rates have been shocked. The segment of unsecured deposit transactions, which represent the cornerstone of capital markets, and is used as basis for the setting of money market benchmark essential to the indexing of trillions of derivative contracts and loans, has been particularly damaged by the surge in counterparty risk. The lack of confidence between traders and the growing fear of counterparty’s bankruptcies have led progressively to a drying out of the unsecured market turnover. After a relative improvement in early 2008, market activity in the unsecured market has again dried up with the reinforcement of the financial crisis following the collapse of Lehman Brothers. Although there are good reasons to think that the market activity in the cash unsecured segment of the money market has remained distorted, in particular for maturities beyond the very short-term, the OIS-LIBOR spreads have been declining extremely steadily since January 2009, both in major currencies and at various maturities, seemingly pointing to a normalization of the money market. On the basis of a simple econometric supported by statistical evidence applied to the euro area date, this paper analyses whether recent developments in the unsecured interest rates actually support a diagnosis of renewed market activity, and of normalization of the unsecured market.

Keywords: LIBOR; EURIBOR; secured segment; fixings; market distortions; financial crisis. (search for similar items in EconPapers)
JEL-codes: C02 C32 G01 G14 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2009-12
New Economics Papers: this item is included in nep-ban, nep-eec, nep-fmk, nep-ifn and nep-mon
References: View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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