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    Do liquidity or credit effects explain the behavior of the BKBM-LIBOR differential?

    Access Status
    Fulltext not available
    Authors
    Poskitt, Russell
    Waller, B.
    Date
    2011
    Type
    Journal Article
    
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    Citation
    Poskitt, R. and Waller, B. 2011. Do liquidity or credit effects explain the behavior of the BKBM-LIBOR differential?. Pacific Basin Finance Journal. 19 (2): pp. 173-193.
    Source Title
    Pacific Basin Finance Journal
    Additional URLs
    http://econpapers.repec.org/article/eeepacfin/v_3a19_3ay_3a2011_3ai_3a2_3ap_3a173-193.htm
    ISSN
    0927-538X
    School
    School of Economics and Finance
    URI
    http://hdl.handle.net/20.500.11937/45956
    Collection
    • Curtin Research Publications
    Abstract

    This paper examines the evolution of the relationship between the onshore and offshore benchmarks for New Zealand dollar funding during the global financial crisis. In August 2007 the BKBM-LIBOR differential switched from positive to negative and then widened considerably following the collapse of Lehman Brothers in September 2008, before narrowing gradually as the turmoil in financial markets subsided. Our structural regression model and decomposition analyses show that changes in liquidity, proxied by bid/ask spreads, largely explain the changes in the BKBM-LIBOR differential over this period and that credit risk factors only played a minor role. However our analysis also shows that bid/ask spreads in the offshore market price information regarding counterparty credit risk, suggesting that our initial results could understate the role played by credit risk factors.

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