An Empirical Analysis of Factors Driving the Swap Spread

Asgharian, Hossein; Karlsson, Sonnie

doi:10.3905/jfi.2008.712349

Cited by 4 publications

(4 citation statements)

References 17 publications

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“…Numerous studies report that the relationship between the interest rate volatility and swap spreads is positive (e.g. Minton, 1997; Lekkos and Milas, 2001; Asgharian and Karlsson, 2008). In addition, Lekkos and Milas (2001), Brown et al (2002), Fang and Muljono (2003), Huang et al (2008), and Chung and Chan (2010) indicate that there is a positive relationship between the liquidity premium and swap spreads.…”

Section: Introductionmentioning

confidence: 99%

Spillovers of international interest rate swap markets and stock market volatility

Lee

Hsu

Chien

2016

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Purpose The purpose of this paper is to investigate volatility spillovers across the interest rate swap markets of the G7 economies, and then the authors investigate whether spillovers of swap markets contain useful information to explain subsequent stock price movements. Design/methodology/approach This study uses the short- and long-term swap spread volatility of the G7 countries to explore the spillover effects of international swap markets, and then investigates the relationship between swap and stock markets. The authors use the generalized VAR approach suggested by Diebold and Yilmaz (2012) to study spillovers of international swap markets. The Granger-causality tests are employed to examine the linkage of interest rate swap and stock markets. Findings This paper shows that a moderate spillover effect exists for the short- and long-term swap markets. Moreover, the results show that the short- and long-term swap markets of France and Germany have a larger impact on other countries’ swap markets than that of other countries’ swap markets on the French and German swap markets. Finally, the results indicate that the total volatility spillovers for the long-term swap markets have a larger influence on the total volatility spillover index of stock markets and the global stock market volatility than that of the short-term swap markets. Originality/value Prior literature has used impulse response and variance decomposition analyses to investigate international swap markets linkages. However, the results depend on the ordering of variables. This study uses the framework of Diebold and Yilmaz (2012) to overcome the ordering issue, and thus the authors can compute directional spillovers. This paper is the first study to explore the linkage of the total volatility spillover of swap markets and the stock markets.

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Section: Introductionmentioning

confidence: 99%

Spillovers of international interest rate swap markets and stock market volatility

Lee

Hsu

Chien

2016

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“…To some extent market risk (volatility) is also used as a determinant of the swap spread (e.g. Sultan (2006); Afonso and Strauch (2007) and Asgharian and Karlsson (2008)). However, the empirical findings from these many studies are not consistent.…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

“…According to this theory, stock price volatility and the associated higher volatility of firm value increases default risk. The default risk explanation for stock market volatility may also be relevant for swaps since some studies find that stock market volatility and swap spreads are positively correlated (Afonso & Strauch, 2007;Asgharian & Karlsson, 2008). From this viewpoint, it should be possible to extract business cycle risk from stock returns, with this risk expected to be positively correlated with the swap spread.…”

Section: Business Cycle Risk In Swapsmentioning

confidence: 99%

“…In addition, these monetary actions can create liquidity distortions in the Government bond term structure, which affect the correlation risk associated with changes in floating rate (short term) and fixed rate (long term) interest rates. Given that swaps have similar features to bonds, Afonso and Strauch (2007) and Asgharian and Karlsson (2008) show that swap spreads vary positively with stock market volatility and hence, the swap spread can contain a systematic risk premium. In a similar sense, correlation risk is also a systematic risk as the co-variation between fixed and floating rates can introduce a risk that should be priced in the swap.…”

Section: Introductionmentioning

confidence: 99%

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What determines the yen swap spread?

Azad

Batten

Fang

2015

International Review of Financial Analysis

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We investigate if Japanese yen denominated interest rate swap spreads price risks in addition to liquidity and default risk. These additional risks include: the time-varying correlation between interest rates of different types and maturities; business cycle risk; and market skewness risk. Our analysis, over a number of different maturities and sample periods, supports the existence of an additional risk premium. We also show that the time-varying correlation between short term market interest rates (e.g., TIBOR) and the longer term Government bond yield (e.g., Gensaki) is of particular importance. Japanese yen swap spreads are shown to contain both pro-cyclical and counter-cyclical elements of business cycle risk, positive risk premia for skewness risk and variable risk premia for correlation risk (between fixed and floating interest rates).

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Fixed

Kakushadze¹,

Serur²

2018

151 Trading Strategies

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An Empirical Analysis of Factors Driving the Swap Spread

Cited by 4 publications

References 17 publications

Spillovers of international interest rate swap markets and stock market volatility

Spillovers of international interest rate swap markets and stock market volatility

What determines the yen swap spread?

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