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Credit and Liquidity in Interbank Rates: a Quadratic Approach

Simon Dubecq (), Alain Monfort (), Jean-Paul Renne and Guillaume Roussellet ()

Working papers from Banque de France

Abstract: We propose a quadratic term-structure model of the EURIBOR-OIS spreads. Contrary to OIS, EURIBOR rates incorporate credit and liquidity risks resulting in compensations for (a) facing default risk of debtors, and (b) possible unexpected funding needs on the lender’s side. Our approach allows us to decompose the whole term structure of spreads into credit- and liquidity-related parts and into an expectation part and risk premiums. Our results shed new light on the effects of unconventional monetary policy carried out in the Eurosystem. In particular, our findings suggest that most of the recent easing in the euro interbank market is liquidity-related.

Keywords: Quadratic term-structure model; liquidity risk; credit risk; interbank market; unconventional monetary policy. (search for similar items in EconPapers)
JEL-codes: E43 E44 G12 G21 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-fmk, nep-mac and nep-mon
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Journal Article: Credit and liquidity in interbank rates: A quadratic approach (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:446

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