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Dissecting interbank risk

Author

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  • Petit, Nuria
  • Lafuente Luengo, Juan Ángel

Abstract

This paper analyses interbank risk using the information content of basis swap (BS) spreads, floating-to-floating interest rate swaps whose payments are associated with euro deposit rates for alternative tenors. We propose an empirical model to decompose BS quotes into expected and unexpected components. To estimate both unobservable constituents of BS spreads, we solve a signal extraction problem using a particle filter. Our empirical findings show that unexpected changes of BS spreads are linked to systemic risk. Shocks to aggregate liquidity are also important to explain regime shifts. Sovereign risk and risk aversion are relevant factors explaining expected fluctuations.

Suggested Citation

  • Petit, Nuria & Lafuente Luengo, Juan Ángel, 2017. "Dissecting interbank risk," DEE - Working Papers. Business Economics. WB 24553, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    • Handle: RePEc:cte:wbrepe:24553
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    References listed on IDEAS

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    More about this item

    Keywords

    Interbank risk;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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