Publication: Determinants of the multiple-term structures from interbank rates
Loading...
Identifiers
Publication date
2015-06
Defense date
Advisors
Tutors
Journal Title
Journal ISSN
Volume Title
Publisher
Impact
Export
Abstract
The classic relationship between deposit rates and interest rate derivatives has been fractured since August 2007. Uncertainty in the interbank money market has increased the risk premia differentials on unsecured deposits rates of different tenors, such as Euribor, leading to a new pricing framework of interest rate derivatives based on multiple curves. This article analyzes the economic determinants of this new multi-curve framework. We employ basis swap (BS) spreads &-floating-to-floating interest rate swaps- as instruments for extracting the interest rate curvedifferentials. Our results show that the multi-curve framework mirrors the standard single-curve setting in terms of level, slope and curvature factors. The level factor captures 90% of the total variation in the curves, and this factor significantly covaries with a proxy for systemic risk. Moreover, the curve residuals are significantly correlated with interbank liquidity. Our empirical findings also show unidirectional causality running from risk (and liquidity) to level (and noise) factors.
Description
Keywords
Basis swap, Noise measure, Credit risk, Liquidity risk, Capital arbitrage