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What drives the Libor–OIS spread? Evidence from five major currency Libor–OIS spreads

Jin Cui, Francis In and Elizabeth Ann Maharaj

International Review of Economics & Finance, 2016, vol. 45, issue C, pages 358-375

Abstract: We investigate the determinants of five major currency Libor–OIS spread changes during the long run and interbank market distress periods. Consistent with recent studies, we find that systemic credit and counterparty risks, market liquidity, and volatility are spread determinants. However, the impact and relevance of these determinants change, depending on the stages of the interbank market crisis. We show that commercial bank leverage and the state of the economy are additional spread drivers. We also discover that the key USD spread is strongly related to banks' risk tolerance levels, capital concerns, and secondary market liquidity during the crisis, even after controlling for other factors.

Keywords: Libor–OIS spread change determinants; Credit and counterparty risks; Market liquidity and volatility; Banking system leverage; State of the economy; Bank risk fundamentals (search for similar items in EconPapers)
JEL-codes: G1 G14 G15 (search for similar items in EconPapers)
Date: 2016
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