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Modeling Term Structures of Swap Spreads

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  • Hua He

Abstract

Swap spreads, the interest rate differentials between the fixed rates on fixed-for-floating swap contracts and the yeilds-to-maturity on maturity-matched government bonds, define a market for one of the most actively transacted securities in the global fixed-income arena. A large universe of fixed-income securities including corporate bonds and mortgaged-back securities use interest rate swap spreads as a key benchmark for pricing and hedging. Swap spreads have received renewed attention since the Fall of 1998 when their volatile movements contributed in a significant way to the financial turmoil that led the US Fed to cut short-term interest rates by 75 basis points. In this paper we present new insights on how to analyze term structure of interest swap spreads. Specificaly, we focus on the determinants of swap spreads and show how quantities such as the spread

Suggested Citation

  • Hua He, 2000. "Modeling Term Structures of Swap Spreads," Yale School of Management Working Papers ysm150, Yale School of Management, revised 01 Mar 2001.
    • Handle: RePEc:ysm:somwrk:ysm150
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    File URL: http://icfpub.som.yale.edu/publications/2410
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    Cited by:

    1. Xiao, Tim, 2017. "A New Model for Pricing Collateralized OTC Derivatives," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 24(4), pages 8-20.
    2. Gurdip Bakshi & Dilip B. Madan & Frank X. Zhang, 2001. "Understanding the role of recovery in default risk models: empirical comparisons and implied recovery rates," Finance and Economics Discussion Series 2001-37, Board of Governors of the Federal Reserve System (U.S.).
    3. Gómez-Puig, Marta, 2008. "Monetary integration and the cost of borrowing," Journal of International Money and Finance, Elsevier, vol. 27(3), pages 455-479, April.
    4. Xiao, Tim, 2012. "An Economic Examination of Collateralization in Different Financial Markets," MPRA Paper 47105, University Library of Munich, Germany.
    5. Liu, Jun & Longstaff, Francis A. & Mandell, Ravit E., 2000. "The Market Price of Credit Risk: An Empirical Analysis of Interest Rate Swap Spreads," University of California at Los Angeles, Anderson Graduate School of Management qt0zw4f9w6, Anderson Graduate School of Management, UCLA.
    6. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2007. "The Demand for Treasury Debt," NBER Working Papers 12881, National Bureau of Economic Research, Inc.
    7. McBrady, Matthew R. & Schill, Michael J., 2007. "Foreign currency-denominated borrowing in the absence of operating incentives," Journal of Financial Economics, Elsevier, vol. 86(1), pages 145-177, October.
    8. Tim Xiao, 2017. "A New Model for Pricing Collateralized Financial Derivatives," Post-Print hal-01800559, HAL.
    9. Marta Gómez-Puig, "undated". "The Impact of Monetary Union on EU-15 Sovereign Debt Yield Spreads," Working Papers on International Economics and Finance 05-11, FEDEA.
    10. Augustin, P. & Chernov, M. & Schmid, L. & Song, D., 2021. "Benchmark interest rates when the government is risky," Journal of Financial Economics, Elsevier, vol. 140(1), pages 74-100.
    11. Feldhütter, Peter & Lando, David, 2008. "Decomposing swap spreads," Journal of Financial Economics, Elsevier, vol. 88(2), pages 375-405, May.
    12. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2012. "The Aggregate Demand for Treasury Debt," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 233-267.
    13. Masaaki Fujii & Akihiko Takahashi, 2009. "A Survey on Modeling and Analysis of Basis Spreads," CARF F-Series CARF-F-195, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    14. Keita Nakayama & Akihiko Takahashi, 2008. "A Factor Allocation Approach to Optimal Bond Portfolio," CIRJE F-Series CIRJE-F-547, CIRJE, Faculty of Economics, University of Tokyo.
    15. Keiichi Tanaka, 2003. "Heterogeneous Yield Curves and Basis Swaps," Discussion Papers in Economics and Business 03-12, Osaka University, Graduate School of Economics.
    16. Keita Nakayama & Akihiko Takahashi, 2006. "A Factor Allocation Approach to Optimal Bond Portfolio (Revised in March 2008, Published in "Asia-Pacific Financial Markets", Vol.14-4, 299-324, 2007. )," CARF F-Series CARF-F-076, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    17. Keita Nakayama & Akihiko Takahashi, 2007. "A Factor Allocation Approach to Optimal Bond Portfolio," CIRJE F-Series CIRJE-F-494, CIRJE, Faculty of Economics, University of Tokyo.
    18. Antulio N. Bomfim, 2003. "Counterparty credit risk in interest rate swaps during times of market stress," Finance and Economics Discussion Series 2003-09, Board of Governors of the Federal Reserve System (U.S.).
    19. Calice, Giovanni, 2011. "The Impact of Collateral Policies on Sovereign CDS Spreads," ECMI Papers 12234, Centre for European Policy Studies.
    20. Keita Nakayama & Akihiko Takahashi, 2007. "A Factor Allocation Approach to Optimal Bond Portfolio," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 14(4), pages 299-324, December.
    21. Masaaki Fujii & Akihiko Takahashi, 2009. "A Survey on Modeling and Analysis of Basis Spreads," CIRJE F-Series CIRJE-F-697, CIRJE, Faculty of Economics, University of Tokyo.

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