Explaining the Czech interbank market risk premium

- We analyze the interbank market risk premium in the Czech Republic.
- Daily bank-by-bank data on PRIBOR quotes are used.
- We explore the role of potential determinants using Bayesian Model Averaging.
- We find a relevant role of market factors and some importance of counterparty risk.

This paper focuses on the development of the interbank market risk premium in the Czech Republic during the global financial crisis. We explain the significant departure of interbank interest rates from the key monetary policy rate by a combination of different factors, including liquidity risk, counterparty risk, foreign influence, interbank relations, and strategic behavior. The results suggest a relevant role of market factors and some importance of counterparty risk.