Understanding Liquidity and Credit Risks in the Financial Crisis
Gefang, Deborah and Koop, Gary and Potter, Simon M. (2010) Understanding Liquidity and Credit Risks in the Financial Crisis. Discussion paper. University of Strathclyde, Glasgow.
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Abstract
This paper develops a structured dynamic factor model for the spreads between London Interbank Offered Rate (LIBOR) and overnight index swap (OIS) rates for a panel of banks. Our model involves latent factors which reflect liquidity and credit risk. Our empirical results show that surges in the short term LIBOR-OIS spreads during the 2007-2009 financial crisis were largely driven by liquidity risk. However, credit risk played a more significant role in the longer term (twelve-month) LIBOR-OIS spread. The liquidity risk factors are more volatile than the credit risk factor. Most of the familiar events in the financial crisis are linked more to movements in liquidity risk than credit risk.
ORCID iDs
Gefang, Deborah, Koop, Gary ORCID: https://orcid.org/0000-0002-6091-378X and Potter, Simon M.;-
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Item type: Monograph(Discussion paper) ID code: 67932 Dates: DateEventOctober 2010PublishedNotes: Discussion paper. Subjects: Social Sciences > Economic History and Conditions Department: Strathclyde Business School > Economics Depositing user: Pure Administrator Date deposited: 21 May 2019 14:16 Last modified: 12 Oct 2024 00:08 URI: https://strathprints.strath.ac.uk/id/eprint/67932