A Yen is not a Yen: TIBOR/LIBOR and the determinants of the 'Japan Premium'

Michael Melvin, Vincentiu Covrig and Buen Low
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Vincentiu Covrig: Singapore University, http://wpcarey.asu.edu/Directory/stafffaculty.cfm?cobid=2133554
Buen Low: Nanyang Technological University, http://wpcarey.asu.edu/Directory/stafffaculty.cfm?cobid=2133917

Working Papers from Department of Economics, W. P. Carey School of Business, Arizona State University

Abstract: Pricing in the Euroyen market is based on LIBOR, the London Interbank Offer Rate, set at 11am London time or TIBOR, the Tokyo Interbank Offer Rate, set at 11am Tokyo time. Since the TIBOR panel is dominated by Tokyo city banks while the LIBOR panel is dominated by non-Japanese banks, the changing TIBOR-LIBOR spread reflects the credit risk associated with Japanese banks or the 'Japan premium.' In this paper, we investigate the determinants of this 'Japan premium.' The spread is modeled as a function of determinants of bank default and firm value suggested by a theory of credit spreads. Our results suggest that systematic variation in the spread can be explained by interest rate and stock price effects along with public information flows of good and bad news regarding Japanese banking, with a separate individual role for Japanese bank credit downgrades and upgrades.

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Journal Article: A Yen is Not a Yen: TIBOR/LIBOR and the Determinants of the Japan Premium (2004)
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