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Dissecting interbank risk using basis swap spreads
Author(s) -
Lafuente Juan Ángel,
Petit Nuria,
Ruiz Jesús,
Serrano Pedro
Publication year - 2020
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/twec.12878
Subject(s) - unobservable , swap (finance) , economics , market liquidity , econometrics , interest rate swap , basis point , systematic risk , interbank lending market , monetary economics , asset (computer security) , liquidity risk , financial economics , interest rate , computer science , finance , computer security
This paper analyses interbank risk using the information content of basis swap (BS) spreads, floating‐to‐floating interest rate swaps whose payments are associated with euro deposit rates for alternative tenors. To identify the impact of shocks affecting interbank risk, we propose an empirical model that decomposes BS quotes into their expected and unexpected components. These unobservable constituents of BS spreads are estimated by solving a signal extraction problem using a particle filter. We find that expected components covariate with aggregate liquidity and risk aversion while systemic risk arises as the main driver behind unexpected fluctuations. Our empirical findings suggest that macroprudential analysis emerges as a key device to ease asset pricing in a new multi‐curve scenario.