A Yen is Not a Yen:  TIBOR/LIBOR and the Determinants of the 'Japan Premium'

Covrig, Vincentiu; Low, Buen Sin; Melvin, Michael

doi:10.2139/ssrn.289060

Cited by 8 publications

(9 citation statements)

References 12 publications

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“…Various observations were found in this regression analysis. Covrig et al (2004) conducted studies on TIBOR/LIBOR and the determinants of the 'Japan Premium'. The study indicated that the changing TIBOR-LIBOR spread affects credit risk associated with Japan premium.…”

Section: Commodity Indices Risk and Return Analysis Against Libor Benmentioning

confidence: 99%

Commodity Indices Risk and Return Analysis Against Libor Benchmark

Valluri

2018

APSTRACT

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This study analyze the risk and return characteristics of commodity index investments against the LIBOR benchmark. Commodity-based asset allocation strategies can be optimized by benchmarking the risk and return characteristics of commodity indices with LIBOR index rate. In this study, we have considered agriculture, energy, and precious metals commodity indices and LIBOR index to determine the risk and return characteristics using estimation techniques in terms of expected return, standard deviation, and geometric mean. We analyzed the publicly available daily market data from 10/9/2001 to 12/30/2016 for benchmarking commodity indices against LIBOR. S&P GSCI Agriculture Index (SGK), S&P GSCI Energy Index (SGJ), and S&P GSCI Precious Metals Index (SGP) are taken to represent each category of widely traded commodities in the regression analysis. Our study uses time series data based on daily prices. Alternative forecasting methodologies for time series analysis are used to cross-check the results. The forecasting techniques used are Holt-Winters Exponential Smoothing and ARIMA. This methodology predicts forecasts using smoothening parameters. The empirical research has shown that the risk of each of the commodity index that represents agriculture, energy, and precious metals sector is smaller compared to its return, whereas LIBOR based interest rate benchmark shows higher risk compared to its return in recession, non-recession and overall periods. László Kozár -György Iván Neszmélyi

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Section: Commodity Indices Risk and Return Analysis Against Libor Benmentioning

confidence: 99%

Commodity Indices Risk and Return Analysis Against Libor Benchmark

Valluri

2018

APSTRACT

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“…In a similar fashion, skewness risk in swaps can be measured using stock market data. In this paper we extract the ideas of skewness risk from a number of studies relevant for swap markets (Adrian & Rosenberg, 2008;Batten & Covrig, 2004;Covrig et al, 2004;Ito & Harada, 2004;and Nishioka & Baba, 2004). Adrian and Rosenberg's (2008) explanation is applicable to any financial product, with skewness risk providing a measure of the tightness of financial constraints.…”

Section: Skewness Risk In Swapsmentioning

confidence: 99%

“…Ignoring the dynamics of the correlation structure between underlying interest rates can also lead to serious errors in the pricing model and hedging decisions. Covrig, Low, and Melvin (2004) and Batten and Covrig (2004) show that skewness risk is present in the short end of the Japanese yield curve, due to pricing distortions associated with the difference between TIBOR and LIBOR interest rates (the Tokyo Interbank Offer Rate and the London Interbank Offer Rate respectively) for unsecured deposits. Thus, determining whether skewness risk is also priced into yen swap spreads is especially important for those market participants who use TIBOR, or LIBOR, based futures contracts to arbitrage, or hedge, the floating rate side of yen interest rate swaps.…”

Section: Introductionmentioning

confidence: 99%

What determines the yen swap spread?

Azad

Batten

Fang

2015

International Review of Financial Analysis

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We investigate if Japanese yen denominated interest rate swap spreads price risks in addition to liquidity and default risk. These additional risks include: the time-varying correlation between interest rates of different types and maturities; business cycle risk; and market skewness risk. Our analysis, over a number of different maturities and sample periods, supports the existence of an additional risk premium. We also show that the time-varying correlation between short term market interest rates (e.g., TIBOR) and the longer term Government bond yield (e.g., Gensaki) is of particular importance. Japanese yen swap spreads are shown to contain both pro-cyclical and counter-cyclical elements of business cycle risk, positive risk premia for skewness risk and variable risk premia for correlation risk (between fixed and floating interest rates).

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“…Figure 10 shows these two rates since the mid 1990s. Peek and Rosengren (2001) and Corvig, Low, and Melvin (2004), risks in the banking sector in Tokyo caused interest rates on inter-bank loans to rise in Tokyo compared with London. In other words, Tibor rates rose relative to Libor rates, as shown in Figure 10 and Figure 11, which shows the Tibor-Libor spread for three-month loans.…”

Section: Developments In Other Countriesmentioning

confidence: 99%

A Black Swan in the Money Market

Taylor¹,

Williams²

2008

ERWP

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At the center of the financial market crisis of 2007-2008 was a highly unusual jump in spreads between the overnight inter-bank lending rate and term London inter-bank offer rates (Libor). Because many private loans are linked to Libor rates, the sharp increase in these spreads raised the cost of borrowing and interfered with monetary policy. The widening spreads became a major focus of the Federal Reserve, which took several actions-including the introduction of a new term auction facility (TAF)-to reduce them. This paper documents these developments and, using a no-arbitrage model of the term structure, tests various explanations, including increased risk and greater liquidity demands, while controlling for expectations of future interest rates. We show that increased counterparty risk between banks contributed to the rise in spreads and find no empirical evidence that the TAF has reduced spreads. The results have implications for monetary policy and financial economics.

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A Yen is Not a Yen: TIBOR/LIBOR and the Determinants of the 'Japan Premium'

Cited by 8 publications

References 12 publications

Commodity Indices Risk and Return Analysis Against Libor Benchmark

Commodity Indices Risk and Return Analysis Against Libor Benchmark

What determines the yen swap spread?

A Black Swan in the Money Market

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