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Determinants of Treasury-LIBOR Swap Spreads

Author

Listed:
  • D. K. Malhotra

    (School of Business Administration, Philadelphia University, School House Lane and Henry Avenue, Philadelphia, PA 19144-5497, USA)

  • Vivek Bhargava

    (Alcorn State University, MBA Program, 15 Campus Drive, Natchez, MS 39120, USA)

  • Mukesh Chaudhry

    (Indiana University of Pennsylvania, 1011 South Drive, Indiana, PA 15705, USA)

Abstract

Using data from the Treasury versus London Interbank Offer Swap Rates (LIBOR) for October 1987 to June 1998, this paper examines the determinants of swap spreads in the Treasury-LIBOR interest rate swap market. This study hypothesizes Treasury-LIBOR swap spreads as a function of the Treasury rate of comparable maturity, the slope of the yield curve, the volatility of short-term interest rates, a proxy for default risk, and liquidity in the swap market. The study finds that, in the long-run, swap spreads are negatively related to the yield curve slope and liquidity in the swap market. We also find that swap spreads are positively related to the short-term interest rate volatility. In the short-run, swap market's response to higher default risk seems to be higher spread between the bid and offer rates.

Suggested Citation

  • D. K. Malhotra & Vivek Bhargava & Mukesh Chaudhry, 2005. "Determinants of Treasury-LIBOR Swap Spreads," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 8(04), pages 687-705.
    • Handle: RePEc:wsi:rpbfmp:v:08:y:2005:i:04:n:s0219091505000567
    DOI: 10.1142/S0219091505000567
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Interest rate swaps; basis swaps; Treasury-LIBOR swaps;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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