Understanding Liquidity and Credit Risks in the Financial Crisis

Deborah Gefang, Gary Koop and Simon Potter

Working Paper series from Rimini Centre for Economic Analysis

Abstract: This paper develops a structured dynamic factor model for the spreads between London Interbank Offered Rate (LIBOR) and overnight index swap (OIS) rates for a panel of banks. Our model involves latent factors which reflect liquidity and credit risk. Our empirical results show that surges in the short term LIBOR-OIS spreads during the 2007-2009 financial crisis were largely driven by liquidity risk. However, credit risk played a more significant role in the longer term (twelve-month) LIBOR-OIS spread. The liquidity risk factors are more volatile than the credit risk factor. Most of the familiar events in the financial crisis are linked more to movements in liquidity risk than credit risk.

Date: 2010-01
New Economics Papers: this item is included in nep-ban
References: View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.rcea.org/RePEc/pdf/wp45_10.pdf (application/pdf)

Related works:
Journal Article: Understanding liquidity and credit risks in the financial crisis (2011)
Working Paper: Understanding Liquidity and Credit Risks in the Financial Crisis (2011)
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:rim:rimwps:45_10

Access Statistics for this paper

More papers in Working Paper series from Rimini Centre for Economic Analysis Contact information at EDIRC.
Bibliographic data for series maintained by Marco Savioli ().