Interbank Offered Rate: Effects of the Financial Crisis on the Information Content of the Fixing

IÉSEG School of Management Working Paper No. 2009-ECO-10

37 Pages Posted: 14 Jul 2010

See all articles by Alexandre Chailloux

Alexandre Chailloux

International Monetary Fund (IMF)

Vincent Brousseau

European Central Bank, Directorate General Economics

Alain Durré

European Central Bank (ECB) - Directorate General Economics; IéSEG - Université Catholique de Lille; National Center for Scientific Research - LEM

Date Written: December 7, 2009

Abstract

With the onset of the financial turmoil in August 2007, pricing references on the money market interest rates have been shocked. The segment of unsecured deposit transactions, which represent the cornerstone of capital markets, and is used as basis for the setting of money market benchmark essential to the indexing of trillions of derivative contracts and loans, has been particularly damaged by the surge in counterparty risk. The lack of confidence between traders and the growing fear of counterparty’s bankruptcies have led progressively to a drying out of the unsecured market turnover. After a relative improvement in early 2008, market activity in the unsecured market has again dried up with the reinforcement of the financial crisis following the collapse of Lehman Brothers. Although there are good reasons to think that the market activity in the cash unsecured segment of the money market has remained distorted, in particular for maturities beyond the very short-term, the OIS-LIBOR spreads have been declining extremely steadily since January 2009, both in major currencies and at various maturities, seemingly pointing to a normalization of the money market. On the basis of a simple econometric supported by statistical evidence applied to the euro area date, this paper analyses whether recent developments in the unsecured interest rates actually support a diagnosis of renewed market activity, and of normalization of the unsecured market.

Keywords: LIBOR, EURIBOR, Secured Segment; Fixings, Market Distortions, Financial Crisis

JEL Classification: G01,G14,C02,C32

Suggested Citation

Chailloux, Alexandre Bruno and Brousseau, Vincent and Durre, Alain C. J., Interbank Offered Rate: Effects of the Financial Crisis on the Information Content of the Fixing (December 7, 2009). IÉSEG School of Management Working Paper No. 2009-ECO-10, Available at SSRN: https://ssrn.com/abstract=1635890 or http://dx.doi.org/10.2139/ssrn.1635890

Alexandre Bruno Chailloux (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Vincent Brousseau

European Central Bank, Directorate General Economics ( email )

Kaiserstrasse 29
Frankfurt am Main, 60311
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Alain C. J. Durre

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

IéSEG - Université Catholique de Lille ( email )

3, rue de la Digue
F-59800 Lille
France

National Center for Scientific Research - LEM ( email )

106-112 Boulevard de l'Hopital
F- 75647 Paris Cedex 13
France

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