Using Interest Rate Derivative Prices to Estimate LIBOR-OIS Spread Dynamics and Systemic Funding Liquidity Shock Probabilities

Cho-Hoi Hui (), Tsz-Kin Chung and Chi-Fai Lo

Asia-Pacific Financial Markets, 2013, vol. 20, issue 2, 146 pages

Abstract: Following the bankruptcy of Lehman Brothers in mid-September 2008, there were severe disruptions in international money markets and banks reportedly faced severe liquidity shocks in particular US dollar funding shortages, prompting central banks around the world to adopt unprecedented policy measures to supply funds to the banks. A better understanding of the forward-looking information content about funding liquidity risk in interest rate derivative prices is therefore necessary to gauge pressures building surrounding systemic liquidity. Using the market prices of the US dollar LIBOR-overnight index swap spread, we estimate the probability of the systemic funding liquidity shock during the crisis period, which deviated from zero on 17 September 2008 to a significant level. This provided an early warning signal of the systemic liquidity shock on 29 September 2008 when the interbank market was totally paralysed. Copyright Springer Japan 2013

Keywords: Sub-prime crisis; Funding liquidity shocks; LIBOR-OIS spread; First-passage-time probability (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1007/s10690-012-9162-z (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:apfinm:v:20:y:2013:i:2:p:131-146

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/10690/PS2

DOI: 10.1007/s10690-012-9162-z

Access Statistics for this article

Asia-Pacific Financial Markets is currently edited by Jiro Akahori

More articles in Asia-Pacific Financial Markets from Springer, Japanese Association of Financial Economics and Engineering
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().