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Journal of Banking & Finance Vol. 78 2017

Interbank interest rates: Funding liquidity risk and XIBOR basis spreads

Janek Gallitschke1; Stefanie Seifried (née Müller); Frank Thomas Seifried2

1 KPMG WPG AG, The Squaire, Am Flughafen, 60549 Frankfurt am Main, Germany · 2 Universität Trier

Abstract

This article presents a theoretical model for interbank money market (XIBOR) rates that endogenously generates the basis spreads that characterize post-crisis fixed income markets: XIBOR-OIS spreads, tenor basis spreads, and the forward basis. Our approach is based on an explicit modeling of interbank cash transactions where interbank credit and liquidity risk are factored in. The framework of this article offers a consistent, arbitrage-free explanation for the emergence of basis spreads. We also demonstrate that funding liquidity is a key determinant of post-crisis XIBOR rates and, in particular, tenor basis spreads.

DOI
10.1016/j.jbankfin.2017.01.002
Volume
78
Pages
142-152
Language
en
Sources
openalex crossref bibtex:phds-export.bib

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