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Dissecting interbank risk

Juan Ángel Lafuente Luengo, Pedro José Serrano Jiménez and Nuria Petit

DEE - Working Papers. Business Economics. WB from Universidad Carlos III de Madrid. Departamento de Economía de la Empresa

Abstract: This paper analyses interbank risk using the information content of basis swap (BS) spreads, floating-to-floating interest rate swaps whose payments are associated with euro deposit rates for alternative tenors. We propose an empirical model to decompose BS quotes into expected and unexpected components. To estimate both unobservable constituents of BS spreads, we solve a signal extraction problem using a particle filter. Our empirical findings show that unexpected changes of BS spreads are linked to systemic risk. Shocks to aggregate liquidity are also important to explain regime shifts. Sovereign risk and risk aversion are relevant factors explaining expected fluctuations.

Keywords: Particle; filter; Liquidity; Systemic; risk; Basis; swap; Interbank; risk (search for similar items in EconPapers)
JEL-codes: G32 G15 G12 G01 (search for similar items in EconPapers)
Date: 2017-05-01
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