The term structure of interbank risk

Damir Filipović and Anders B. Trolle

Journal of Financial Economics, 2013, vol. 109, issue 3, 707-733

Abstract: We infer a term structure of interbank risk from spreads between rates on interest rate swaps indexed to the London Interbank Offered Rate (LIBOR) and overnight indexed swaps. We develop a tractable model of interbank risk to decompose the term structure into default and non-default (liquidity) components. From August 2007 to January 2011, the fraction of total interbank risk due to default risk, on average, increases with maturity. At short maturities, the non-default component is important in the first half of the sample period and is correlated with measures of funding and market liquidity. The model also provides a framework for pricing, hedging, and risk management of interest rate swaps in the presence of significant basis risk.

Keywords: Interbank risk; LIBOR; Interest rate swaps; Default risk; Liquidity (search for similar items in EconPapers)
JEL-codes: E43 G01 G12 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (77)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:109:y:2013:i:3:p:707-733

DOI: 10.1016/j.jfineco.2013.03.014

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