Understanding Liquidity and Credit Risks in the Financial Crisis*

Deborah Gefang, Gary Koop and Simon Potter

No 1114, Working Papers from University of Strathclyde Business School, Department of Economics

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 relect 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.

Keywords: LIBOR-OIS spread; factor model; credit default swap; Bayesian (search for similar items in EconPapers)
JEL-codes: C11 C22 G21 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2011-04
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fmk and nep-rmg
References: View complete reference list from CitEc
Citations: View citations in EconPapers (38)

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http://www.strath.ac.uk/media/1newwebsite/departme ... 2011/11-14_Final.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)
Working Paper: Understanding Liquidity and Credit Risks in the Financial Crisis (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:str:wpaper:1114

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