What moves benchmark money market rates? Evidence from the BBSW market

In this study we examine the daily movements of a benchmark interest rate using the bank bill swap rate (BBSW) over the period from 2006 to 2016. By decomposing the BBSW into its credit risk and liquidity risk components we reveal that the relative importance of these priced components are conditional on economic uncertainty. Although the compensation required for credit risk increased markedly during the period 2007-2009, the liquidity risk component exerted a disproportionately stronger effect on short-term BBSW spreads relative to credit risk. Our findings show that using a market-based approach to setting credit-based benchmark interest rates introduces both a liquidity and credit risk premia into benchmark interest rates, and both of these risk premia are affected by market forces.