Understanding Liquidity and Credit Risks in the Financial Crisis
نویسندگان
چکیده
This paper develops a structured dynamic factor model for the spreads between London Interbank O¤ered Rate (LIBOR) and overnight index swap (OIS) rates for a panel of banks. Our model involves latent factors which reect liquidity and credit risk. Our empirical results show that surges in the short term LIBOR-OIS spreads during the 2007-2009 nancial crisis were largely driven by liquidity risk. However, credit risk played a more signi cant 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 nancial crisis are linked more to movements in liquidity risk than credit risk. The views expressed in this paper are those of the authors and do not necessarily reect the views of the Federal Reserve Bank of New York or the Federal Reserve System. Gary Koop is a Fellow of the Rimini Center for Economic Analysis.
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