USD LIBOR 2002-2008: predictability in times of credit tightening and expansion

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Written by Forex Automaton   
Tuesday, 13 January 2009 12:15
Article Index
USD LIBOR 2002-2008: predictability in times of credit tightening and expansion
USD LIBOR s/n-o/n autocorrelations, year-by-year comparison
USD LIBOR 1-week autocorrelations, year-by-year comparison
USD LIBOR 1-month autocorrelations, year-by-year comparison
USD LIBOR autocorrelations, 3-month and longer terms, year-by-year comparison
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The original USD LIBOR technical predictability note presented a time-integrated measurement of autocorrelations and cross-correlations associated with the USD LIBOR of various maturities. This note follows up on the topic with a time-evolution study, splitting the 2002-2008 range into separate year-long intervals. Due to changes in volatility, the integrated picture might be dominated by a few time periods of the highest volatility.  For this and other reasons, a time-evolution study is useful. It's interesting that LIBOR correlations from 2008, the year of credit crisis, look neither uninformative nor artificial. While the LIBOR patterns of 2008 are quantitatively different from other years, they do not look fundamentally different from other years with falling interest rates -- once the monstrous volatility of 2008 is taken out of the picture by proper normalization. The main finding is that the correlation patterns in the years of falling interest rates are similar among themselves and different as a class from those found in the years of rising interest rates  The interest-rate hike regime is seen as more predictable for the money markets, predictability being defined purely technically as a non-zero correlation at non-zero time lags.

BBA tracks LIBORs for various loan durations (maturities). For this study, I focus on spot-next/overnight (s/n-o/n), 1 week, 1 month, 3 month, 6-month and 1 year maturities.

History of s/n-o/n USD LIBOR 2002-2008 History of 1 month USD LIBOR 2002-2008 History of 12-month USD LIBOR 2002-2008

Fig.1: Historical USD LIBOR rates charts, top to bottom: s/n-o/n, 1-month and 12-month. Time axis is labeled in MM-YY format.

Based on Fig.2, I identify years of rising and falling spot LIBOR. Years of rising LIBOR are 2003, 2004, 2005, and 2006. Years of falling LIBOR are 2002, 2007, and 2008. These will be grouped together (into the "rising" group and the "falling" group) in this study.



Last Updated ( Monday, 04 January 2010 12:42 )