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Heterogeneous Yield Curves and Basis Swaps

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  • Keiichi Tanaka

    (Graduate School of Economics, Osaka University)

Abstract

We present a framework of heterogeneous yield curves of agents based on the pricing kernel approach in order to model LIBOR and basis swap rates. Each yield curve may imply different prices of assets but is consistent with swap rates, basis swap rates and foreign exchange rates. We show three conditions that gurantee the no-arbitrage and the consistency with these rate processes. The introduction of contributors and the Market Representative Agent ( gMRA h) leads to an explanation of a non-zero basis swap rate as a swap rate priced by one of the MRAs.

Suggested Citation

  • Keiichi Tanaka, 2003. "Heterogeneous Yield Curves and Basis Swaps," Discussion Papers in Economics and Business 03-12, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:0312
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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0312.pdf
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    References listed on IDEAS

    as
    1. Hua He, 2000. "Modeling Term Structures of Swap Spreads," Yale School of Management Working Papers ysm150, Yale School of Management, revised 01 Mar 2001.
    2. Farshid Jamshidian, 1997. "LIBOR and swap market models and measures (*)," Finance and Stochastics, Springer, vol. 1(4), pages 293-330.
    3. Pierre Collin‐Dufresne & Bruno Solnik, 2001. "On the Term Structure of Default Premia in the Swap and LIBOR Markets," Journal of Finance, American Finance Association, vol. 56(3), pages 1095-1115, June.
    4. L. C. G. Rogers, 1997. "The Potential Approach to the Term Structure of Interest Rates and Foreign Exchange Rates," Mathematical Finance, Wiley Blackwell, vol. 7(2), pages 157-176, April.
    5. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
    6. Duffie, Darrell & Huang, Ming, 1996. "Swap Rates and Credit Quality," Journal of Finance, American Finance Association, vol. 51(3), pages 921-949, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Interest rate swap; Basis swap; Pricing kernel; Risk premium; LIBOR;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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