Euribor basis swap spread
1University of Oulu, Oulu Business School, Department of Finance, Finance
|Online Access:||PDF Full Text (PDF, 2.1 MB)|
|Persistent link:|| http://urn.fi/URN:NBN:fi:oulu-201406241775
|Publish Date:|| 2014-06-30
|Thesis type:||Master's thesis
The aim of the study is to investigate the factors affecting Euribor basis swap spreads. Variables are divided into three component; liquidity risk, credit risk, and macroeconomic and monetary policy. The Euribor basis swap was close to zero basis points, but during the early phases of the latest financial crises the spreads jumped.
In empirical part of the study, the stationarity of the variables is tested. In the next step, Phillips-Ouliaris (P-O) co-integration test is tested to get 5 combinations that co-integrates with Euribor basis swap spread 3 month versus 12 month with 5 years to maturity. Thirdly, long-run equilibrium for the Models with Engle-Granger test is applied. Out of the five Models, picked in P-O, only three had long-run equilibrium. From the three long-run equilibrium Models the regression residuals are saved and estimated short-term equilibrium with Error Correction Model. At the end, Ordinary Least Square method with Newey-West corrections with the three co-integrated Models is tested.
The variables for liquidity risk component are Open Market Operations, Aggregate Liquidity Factors, Deposit Facility, and Governing Council Meeting day -dummy. The variables for the credit risk component are Eurobond yield and Bank Credit Default Swap spread. The variables for the macroeconomic and monetary policy component are Euro Overnight-Index Average and exchange rate.
The results show that the biggest determinants for the Euribor basis swap spread 3m vs 12m 5y are Open Market Operations, Meeting day, Eurobond yield 5y, Bank CDS, EONIA, and exchange rate of China.
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