Pricing Anomalies in Interest Rate Markets During the Financial Crisis of 2007-2009

11 Pages Posted: 24 Oct 2009

See all articles by Cho-Hoi Hui

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department

Tsz-Kin Chung

IHS Markit; Tokyo Metropolitan University

Date Written: October 22, 2009

Abstract

This paper examines pricing anomalies in the interest rate markets during the financial crisis of 2007-2009. Before the failure of Lehman credit and funding constraints weakened the relationship between interest rates of LIBOR and derivatives in the euro, British pound and US dollar, with equivalent discounted cash flows, and hence gave rise to pricing anomalies that would not usually exist. After the Lehman failure, the pricing anomalies in the two European currencies reduced with the relaxation of the funding constraint. The funding and credit constraints however became insignificant for the pricing anomalies in the dollar which persisted during the first half of 2009.

Keywords: Interest rate markets, sub-prime crisis, funding constraints, pricing anomalies

JEL Classification: F31, G13

Suggested Citation

Hui, Cho-Hoi and Chung, Tsz-Kin, Pricing Anomalies in Interest Rate Markets During the Financial Crisis of 2007-2009 (October 22, 2009). Available at SSRN: https://ssrn.com/abstract=1492965 or http://dx.doi.org/10.2139/ssrn.1492965

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department ( email )

Hong Kong
China

Tsz-Kin Chung (Contact Author)

IHS Markit ( email )

Tokyo
Japan

Tokyo Metropolitan University

1-1 Minami Ohsawa Hachioji-shi
Tokyo 192-0397
Japan