What drives the Libor–OIS spread?: Evidence from five major currency Libor–OIS spreads

Jin Cui; Francis In; Elizabeth Ann Maharaj

doi:10.1016/j.iref.2016.04.002

What drives the Libor–OIS spread? Evidence from five major currency Libor–OIS spreads

Jin Cui, Francis In, Elizabeth Ann Maharaj

Research output: Contribution to journal › Article › Research › peer-review

6 Citations (Scopus)

Abstract

We investigate the determinants of five major currency Libor–OIS spread changes during the long run and interbank market distress periods. Consistent with recent studies, we find that systemic credit and counter party risks, market liquidity, and volatility are spread determinants. However, the impact and relevance of these determinants change, depending on the stages of the interbank market crisis. We show that commercial bank leverage and the state of the economy are additional spread drivers. We also discover that the key USD spread is strongly related to banks' risk tolerance levels, capital concerns, and secondary market liquidity during the crisis, even after controlling for other factors.

Original language	English
Pages (from-to)	358-375
Number of pages	18
Journal	International Review of Economics and Finance
Volume	45
DOIs	https://doi.org/10.1016/j.iref.2016.04.002
Publication status	Published - 1 Sept 2016

Keywords

Bank risk fundamentals
Banking system leverage
Credit and counterparty risks
Libor–OIS spread change determinants
Market liquidity and volatility
State of the economy

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10.1016/j.iref.2016.04.002

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title = "What drives the Libor–OIS spread?: Evidence from five major currency Libor–OIS spreads",

abstract = "We investigate the determinants of five major currency Libor–OIS spread changes during the long run and interbank market distress periods. Consistent with recent studies, we find that systemic credit and counter party risks, market liquidity, and volatility are spread determinants. However, the impact and relevance of these determinants change, depending on the stages of the interbank market crisis. We show that commercial bank leverage and the state of the economy are additional spread drivers. We also discover that the key USD spread is strongly related to banks' risk tolerance levels, capital concerns, and secondary market liquidity during the crisis, even after controlling for other factors.",

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AU - Maharaj, Elizabeth Ann

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N2 - We investigate the determinants of five major currency Libor–OIS spread changes during the long run and interbank market distress periods. Consistent with recent studies, we find that systemic credit and counter party risks, market liquidity, and volatility are spread determinants. However, the impact and relevance of these determinants change, depending on the stages of the interbank market crisis. We show that commercial bank leverage and the state of the economy are additional spread drivers. We also discover that the key USD spread is strongly related to banks' risk tolerance levels, capital concerns, and secondary market liquidity during the crisis, even after controlling for other factors.

AB - We investigate the determinants of five major currency Libor–OIS spread changes during the long run and interbank market distress periods. Consistent with recent studies, we find that systemic credit and counter party risks, market liquidity, and volatility are spread determinants. However, the impact and relevance of these determinants change, depending on the stages of the interbank market crisis. We show that commercial bank leverage and the state of the economy are additional spread drivers. We also discover that the key USD spread is strongly related to banks' risk tolerance levels, capital concerns, and secondary market liquidity during the crisis, even after controlling for other factors.

KW - Bank risk fundamentals

KW - Banking system leverage

KW - Credit and counterparty risks

KW - Libor–OIS spread change determinants

KW - Market liquidity and volatility

KW - State of the economy

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EP - 375

JO - International Review of Economics and Finance

JF - International Review of Economics and Finance

ER -

What drives the Libor–OIS spread? Evidence from five major currency Libor–OIS spreads

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Keywords

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