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24.01.2009

Eonia and Euribor indicate further stress in Interbank market

Money Markets remain stressed in late January. Eonia on Thursday 22nd January was at 1.498 % but 3M Euriobor was at 2.254 % with these significant differentials being reported in articles on Reuters and the  FT

We have inserted a couple of papers on the phenomenom of the Eonia spread and its importance to Liquidity Risk:

1 Neyer and Wiemers paper (Interbank market dynamics), incuding the following defintion of Eonia and Euriobor

The reference rate in this segment (unsecured lending) is the Eonia (Euro Overnight Index Average). It is a market index computed as the weighted average of overnight unsecured lending transactions undertaken by a representative panel of banks. The same panel banks contributing to the Eonia also quote for the Euribor (Euro Interbank offered Rate). The Euribor is the rate at which euro interbank term deposits are offered by one prime bank to another prime bank. This is the reference rate for maturities of one, two and three weeks and for twelve maturities from one to twelve months ....(P6)

and

2 Linzert and Schmidt who have a 2007 model to detemine the Eonia spread which they account for by the following significant phenomenom:

  • Liquidity deficits of banks
  • opportunity costs (the market is heteregenous)
  • lagged spreads - this is indeed raised in the FT article, with the expectation of the spread narrowing through time
  • reserve fulfillment
  • policy uncertainty

See the documents hosted on the Liquidity Risk microsite for full details

 

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