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Do liquidity or credit effects explain the behavior of the BKBM-LIBOR differential?

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  • Poskitt, Russell
  • Waller, Bradley

Abstract

This paper examines the evolution of the relationship between the onshore and offshore benchmarks for New Zealand dollar funding during the global financial crisis. In August 2007 the BKBM-LIBOR differential switched from positive to negative and then widened considerably following the collapse of Lehman Brothers in September 2008, before narrowing gradually as the turmoil in financial markets subsided. Our structural regression model and decomposition analyses show that changes in liquidity, proxied by bid/ask spreads, largely explain the changes in the BKBM-LIBOR differential over this period and that credit risk factors only played a minor role. However our analysis also shows that bid/ask spreads in the offshore market price information regarding counterparty credit risk, suggesting that our initial results could understate the role played by credit risk factors.

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  • Poskitt, Russell & Waller, Bradley, 2011. "Do liquidity or credit effects explain the behavior of the BKBM-LIBOR differential?," Pacific-Basin Finance Journal, Elsevier, vol. 19(2), pages 173-193, April.
    • Handle: RePEc:eee:pacfin:v:19:y:2011:i:2:p:173-193
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    Cited by:

    1. Mesias Alfeus, 2019. "Stochastic Modelling of New Phenomena in Financial Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2019, January-A.
    2. Woon Wong & Iris Biefang-Frisancho Mariscal & Peter Howells, 2019. "Liquidity and credit risks in the UK’s financial crisis: how ‘quantitative easing’ changed the relationship," Applied Economics, Taylor & Francis Journals, vol. 51(3), pages 278-287, January.
    3. repec:uts:finphd:41 is not listed on IDEAS
    4. Alexius, Annika & Birenstam, Helene & Eklund, Johanna, 2014. "The interbank market risk premium, central bank interventions, and measures of market liquidity," Journal of International Money and Finance, Elsevier, vol. 48(PA), pages 202-217.
    5. Stenfors, Alexis, 2014. "LIBOR deception and central bank forward (mis-)guidance: Evidence from Norway during 2007–2011," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 32(C), pages 452-472.
    6. Casavecchia, Lorenzo & Loudon, Geoffrey F. & Wu, Eliza, 2018. "What moves benchmark money market rates? Evidence from the BBSW market," Pacific-Basin Finance Journal, Elsevier, vol. 51(C), pages 137-154.
    7. Cui, Jin & In, Francis & Maharaj, Elizabeth Ann, 2016. "What drives the Libor–OIS spread? Evidence from five major currency Libor–OIS spreads," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 358-375.

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