EconStor >
ifo Institut – Leibniz-Institut für Wirtschaftsforschung an der Universität München >
CESifo Working Papers, CESifo Group Munich >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/39016
  
Title:Liquidity risk, credit risk and the overnight interest rate spread: A stochastic volatility modelling approach PDF Logo
Authors:Beirne, John
Caporale, Guglielmo Maria
Spagnolo, Nicola
Issue Date:2010
Series/Report no.:CESifo working paper Monetary Policy and International Finance 3115
Abstract:In this paper we model the volatility of the spread between the overnight interest rate and the central bank policy rate (the policy spread) for the euro area and the UK during the two main phases of the financial crisis that began in late 2007. During the crisis, the policy spread exhibited signs of volatility, owing to the breakdown in interbank market activity. The determinants of this volatility are assessed using Stochastic Volatility models to gauge the role played by liquidity risk, credit risk (financial and sovereign), and interest rate expectations. Our results suggest that liquidity risk is the main determinant of the volatility of the policy spread, but also that private bank credit risk has become more apparent in the post-Lehman collapse phase of the crisis for the euro area as financial CDS premia rose due to possible default fears. In addition, the ECB appears to have been more effective in addressing liquidity risk since the onset of the crisis, and this may be related to its greater direct access to a broader range of counterparties and its acceptance of a broader range of eligible collateral. The main implication is that, in crisis times, a sufficiently flexible operational framework for monetary policy implementation produces the most timely response to market tensions.
Subjects:overnight interest rate spread
liquidity risk
credit risk
stochastic volatility
JEL:C32
E52
E58
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

Files in This Item:
File Description SizeFormat
631013415.pdf193.77 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/39016

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.