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The components of interest rate swap spreads: Theory and international evidence

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  • Frank Fehle

Abstract

This article contains both a theoretical and an empirical analysis of the components of interest rate swap spreads defined as the difference between the fixed swap rate and the risk‐free rate of equal maturity. The components are determined by expected LIBOR spreads, default risk, and market structure. A model of the swap market incorporating debt market imperfections and corporate financing choices is used to explain participation by both swap buyers and sellers. The model also motivates an empirical relationship between swap spreads and the slope of the risk‐free term structure. The article then provides empirical evidence on the cross‐sectional and time‐series variation of swap spreads in seven international markets. The evidence is consistent with the suggested components across both markets and swap maturities as well as over time. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:347–387, 2003

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  • Frank Fehle, 2003. "The components of interest rate swap spreads: Theory and international evidence," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 23(4), pages 347-387, April.
    • Handle: RePEc:wly:jfutmk:v:23:y:2003:i:4:p:347-387
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    Cited by:

    1. Li, Shaoyu & Zhu, Chunhui & Shang, Yuhuang, 2023. "Hedging demand and near-zero swap spreads: Evidence from the Chinese interest rate swap market," The Quarterly Review of Economics and Finance, Elsevier, vol. 91(C), pages 170-185.
    2. Takayasu Ito, 2010. "Global financial crisis and US interest rate swap spreads," Applied Financial Economics, Taylor & Francis Journals, vol. 20(1-2), pages 37-43.
    3. Kenneth A. Tah, 2022. "Determinants of Interest rate swap spreads: A quantile regression approach," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(3), pages 522-534, July.
    4. Azad, A.S.M. Sohel & Batten, Jonathan A. & Fang, Victor, 2015. "What determines the yen swap spread?," International Review of Financial Analysis, Elsevier, vol. 40(C), pages 1-13.
    5. Benbouzid, Nadia & Mallick, Sushanta & Pilbeam, Keith, 2018. "The housing market and the credit default swap premium in the UK banking sector: A VAR approach," Research in International Business and Finance, Elsevier, vol. 44(C), pages 1-15.
    6. Ying Huang & Carl R. Chen, 2007. "The effect of Fed monetary policy regimes on the US interest rate swap spreads," Review of Financial Economics, John Wiley & Sons, vol. 16(4), pages 375-399.
    7. Benbouzid, Nadia & Mallick, Sushanta, 2013. "Determinants of bank credit default swap spreads: The role of the housing sector," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 243-259.
    8. David-Pur, Lior & Galil, Koresh & Rosenboim, Mosi, 2020. "The dynamics of sovereign yields over swap rates in the Eurozone market," International Review of Financial Analysis, Elsevier, vol. 72(C).

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