The Term Structure of Interbank Risk

Damir Filipović, Anders Bjerre Trolle

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

We infer a term structure of interbank risk from spreads between rates on interest rate swaps indexed to the London Interbank Offered Rate (LIBOR) and overnight indexed swaps. We develop a tractable model of interbank risk to decompose the term structure into default and non-default (liquidity) components. From August 2007 to January 2011, the fraction of total interbank risk due to default risk, on average, increases with maturity. At short maturities, the non-default component is important in the first half of the sample period and is correlated with measures of funding and market liquidity. The model also provides a framework for pricing, hedging, and risk management of interest rate swaps in the presence of significant basis risk.
Original languageEnglish
JournalJournal of Financial Economics
Volume109
Issue number3
Pages (from-to)707-733
Number of pages25
ISSN0304-405X
DOIs
Publication statusPublished - 2013
Externally publishedYes

Keywords

  • Interbank risk
  • LIBOR
  • Interest rate swaps
  • Default risk
  • Liquidity

Cite this