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 journalArticleResearchpeer-review

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 languageEnglish
Pages (from-to)358-375
Number of pages18
JournalInternational Review of Economics and Finance
Volume45
DOIs
Publication statusPublished - 1 Sep 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

Cite this

@article{2e4abf59a8944e628ad1a0c798c5005b,
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.",
keywords = "Bank risk fundamentals, Banking system leverage, Credit and counterparty risks, Libor–OIS spread change determinants, Market liquidity and volatility, State of the economy",
author = "Jin Cui and Francis In and Maharaj, {Elizabeth Ann}",
year = "2016",
month = "9",
day = "1",
doi = "10.1016/j.iref.2016.04.002",
language = "English",
volume = "45",
pages = "358--375",
journal = "International Review of Economics and Finance",
issn = "1059-0560",
publisher = "Elsevier",

}

What drives the Libor–OIS spread? Evidence from five major currency Libor–OIS spreads. / Cui, Jin; In, Francis; Maharaj, Elizabeth Ann.

In: International Review of Economics and Finance, Vol. 45, 01.09.2016, p. 358-375.

Research output: Contribution to journalArticleResearchpeer-review

TY - JOUR

T1 - What drives the Libor–OIS spread?

T2 - Evidence from five major currency Libor–OIS spreads

AU - Cui, Jin

AU - In, Francis

AU - Maharaj, Elizabeth Ann

PY - 2016/9/1

Y1 - 2016/9/1

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

UR - http://www.scopus.com/inward/record.url?scp=84978079913&partnerID=8YFLogxK

U2 - 10.1016/j.iref.2016.04.002

DO - 10.1016/j.iref.2016.04.002

M3 - Article

VL - 45

SP - 358

EP - 375

JO - International Review of Economics and Finance

JF - International Review of Economics and Finance

SN - 1059-0560

ER -