USD LIBOR predictability 2007-2010: shorter maturities show the way

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Written by Forex Automaton   
Friday, 22 October 2010 09:59
Article Index
USD LIBOR predictability 2007-2010: shorter maturities show the way
USD LIBOR autocorrelations
Correlations between USD LIBOR maturities, overnight and longer terms
Correlations between USD LIBOR maturities, 1-week and longer terms, 1-month and longer terms
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A series of LIBOR correlation articles published on this site in late 2008--early 2009 were very well received by the readers. The financial panic of 2008 was the most extreme event for LIBOR, and for reasons of timing, was not covered very well in these articles. Now, I am coming back to the topic with more data and the same statistical analysis framework. The data presented here cover the period from August 16, 2007 (the day Countrywide Financial made the news, triggering a change in the Fed stance) through July 30, 2010. The period chosen is the one characterized by the US Fed single-minded focus on lowering the short- and longer-term interest rates. Not surprisingly, this definite trend shows up in the correlation analysis as a broad positive correlation peak. Cross-correlation analysis of different maturities shows shorter maturities to play the role of leading indicators for the longer ones. The effect has a characteristic time length of up to ten days. It is the most prominent when combining overnight LIBOR with the 1-month one, or combining the 1-week LIBOR with longer terms.

LIBOR charts

History of overnight USD LIBOR 2007-2010 History of 1-week USD LIBOR 2007-2010 History of 6-month USD LIBOR 2007-2010 History of 12-month USD LIBOR 2007-2010

Fig.1: Historical USD LIBOR charts, top to bottom: overnight, 1-week, 6-month, and 12-month maturity. Time axis is labeled in MM-YY format. The data covers the time range from 2007-08-16 to 2010-07-30.

The credit crunch of 2008 is seen in the charts as a series of spikes in the overnight LIBOR and a more solid local maximum of LIBOR for longer maturities. Traditionally, the Fed manipulates the short term rates through the Open Market mechanism. These are seen to hit the ground as early as December 2008. The longer term rates continued to move down for another year. Which ones lead and which ones follow is not at all obvious from the charts, and requires correlation analysis.



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