Modelling the term structure of interbank risk

Specialeforsvar: Agnethe Sandholdt Lausten

Titel: Modelling the term structure of interbank risk

Abstract: This thesis investigates the interbank risk in the EURO money market based on the interbank term structure model from Filipovic and Trolle (2013) [11]. The European Interbank Offered Rate (EURIBOR) is a benchmark rate based on unsecured lending. By analyzing the spread between Interest Rate Swaps index to the EURIBOR rate and Overnight Indexed Swaps the
future interbank risk of the EURIBOR panel can be determined from the term structure. The theoretical model splits the spread into two driving components. Credit risk of the EURIBOR panel and a liquidity component. The time series is from 11.11.2019-11.09.2023, which contain the below zero interest rate regime and historical rate hikes from the European Central Bank. It shows that borrowing unsecured overnight requires a premium in compensation for carrying credit risk the average EURIBOR panel bank. A simplified Interest Rate Swap model only containing liquidity risk, shows that the EURIBOR rate contains liquidity
risk and there is premium related to that risk.

Vejleder: David Glavind Skovmand
Censor:  Mads Stenbo Nielsen,  CBS