We propose a quadratic term-structure model of the EURIBOR-OIS spreads. Contrary to OIS, EURIBOR rates incorporate credit and liquidity risks resulting in compensations for (a) facing default risk of debtors, and (b) possible unexpected funding needs on the lender’s side. Our approach allows us to decompose the whole term structure of spreads into credit- and liquidity-related parts and into an expectation part and risk premiums. Our results shed new light on the effects of unconventional monetary policy carried out in the Eurosystem. In particular, our findings suggest that most of the recent easing in the euro interbank market is liquidity-related.
Simon Dubecq, Alain Monfort, Jean-Paul Renne and Guillaume Roussellet
Classification JEL : E43, E44, G12, G21
Keywords : Quadratic term-structure model, liquidity risk, credit risk, interbank market, unconventional monetary policy.
Updated on: 06/12/2018 11:10