Abstract
EURIBOR emerged as a conventional proxy for a risk-free rate for a reasonably long period of time after the creation of the Eurozone. However, the joy was short-lived, as the global credit crisis shook the markets in mid-2008. Significant counterparty risk embedded in a derivative transaction cannot be left out. EURIBOR reflects the credit spread on borrowing. Hence, risk and uncertainty are inextricably linked here. This study investigates five banks out of 19 panel banks that manage EURIBOR in various Eurozone countries. These banks, HSBC, ING, Deutsche Bank, the National Bank of Greece and Barclays, are tested from January 2009 to December 2017 on a daily basis. Bank specific EURIBOR can be predicted in all five cases with different degrees. The trace of a profound herd is observed in the case of the National Bank of Greece, others were relatively mild in nature. The customer base and their risk grade were recognized as the main factor. Their information asymmetry and derived information entropy suggest embedded chaos and uncertainty.
Highlights
Swap rates were based entirely upon interbank lending rates (e.g., LIBOR, EURIBOR, etc.)
Significant counterparty risk embedded in a derivative transaction cannot be left out
The trace of a profound herd is observed in the case of the National Bank of Greece, others were relatively mild in nature
Summary
Swap rates were based entirely upon interbank lending rates (e.g., LIBOR, EURIBOR, etc.) This indicates that they were essentially risk-free in nature. A significant counterparty risk in derivative transactions was identified They were not subject to collateral or margin calls. This was most evident when Lehman Brothers failed at a time when it was a counterparty to more than 930,000 derivative transactions. The apparent panic-stricken herd behavior during the financial crisis and the resultant bubble in the stock market created a crash possibility. Herd behavior caused a bubble in the market, which led to a market crash due to the downside effect almost instantly (Filip, Pochea & Pece, 2015)
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