Abstract
| Language | English |
|---|---|
| Pages | 903-914 |
| Number of pages | 12 |
| Journal | Journal of Empirical Finance |
| Volume | 18 |
| Early online date | 3 Aug 2011 |
| DOIs | |
| Publication status | Published - 2011 |
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Keywords
- dynamic factor model
- LIBOR-OIS spread
- credit default swap
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Understanding liquidity and credit risks in the financial crisis. / Gefang, Deborah; Koop, Gary; Potter, Simon M.
In: Journal of Empirical Finance, Vol. 18, 2011, p. 903-914.Research output: Contribution to journal › Article
TY - JOUR
T1 - Understanding liquidity and credit risks in the financial crisis
AU - Gefang, Deborah
AU - Koop, Gary
AU - Potter, Simon M.
PY - 2011
Y1 - 2011
N2 - 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.
AB - 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.
KW - dynamic factor model
KW - LIBOR-OIS spread
KW - credit default swap
UR - http://www.scopus.com/inward/record.url?scp=81455154475&partnerID=8YFLogxK
U2 - 10.1016/j.jempfin.2011.07.006
DO - 10.1016/j.jempfin.2011.07.006
M3 - Article
VL - 18
SP - 903
EP - 914
JO - Journal of Empirical Finance
T2 - Journal of Empirical Finance
JF - Journal of Empirical Finance
SN - 0927-5398
ER -