Identifying the Factors that Affect Interest‐Rate Swap Spreads: Some Evidence from the United States and the United Kingdom

Lekkos, Ilias; Milas, Costas

doi:10.1002/fut.1803

Cited by 58 publications

(77 citation statements)

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“…Duffie and Singleton (1997) and Lekkos and Milas (2001) have extended this research to a multivariate vector autoregression (VAR) framework. Duffie and Singleton (1997) find that the biggest part of swap spreads variation is due to their own shocks.…”

Section: Introductionmentioning

confidence: 99%

“…Eom, Subrahmanyam, and Uno (2000) report that the 1 Duffie and Singleton (1997) define liquidity risk as the spread between generic and on-the-run repo rates for the 10-year government bonds, while Lekkos and Milas (2001) define liquidity risk as the difference between the three-month LIBOR and three-month T-bill rates (TED spread). Lekkos and Milas (2001) have provided some preliminary evidence on the impact of U.S. factors on UK swap markets and Eom, Subrahmanyam, and Uno (2000) on the links between U.S. and Japanese swap markets. Fehle (2000) examines the impact that U.S. swap spreads have on British, German, French, Japanese, Spanish, and Dutch swap markets.…”

Section: Introductionmentioning

confidence: 99%

“…Default risk is more significant over long horizons and for longer maturity swap spreads. Lekkos and Milas (2001) assess the ability of factors such as the level, volatility and slope of the zero-coupon government bond yield curve, the TED spread and the corporate bond spread to describe the term structure of the U.S. and UK swap spreads. They find that the slope of the term structure has a significant countercyclical effect across maturities while the TED and corporate spreads play a smaller role and their significance varies across maturities.…”

Section: Introductionmentioning

confidence: 99%

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Common risk factors in the U.S. and UK interest rate swap markets: Evidence from a nonlinear vector autoregression approach

Lekkos

Milas

2004

Journal of Futures Markets

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This paper produces evidence in support of the existence of common risk factors in the U.S. and UK interest rate swap markets. Using a multivariate smooth transition autoregression (STVAR) framework, we show that the dynamics of the U.S. and UK swap spreads are best described by a regime-switching model. We identify the existence of two distinct regimesWe would like to thank Robert Webb (the Editor) and a referee of this journal for very useful comments and suggestions. We have also benefited from the comments of Dick Van Dijk (who has provided us with nonlinear routines in Gauss), Mike Clements, Gary Koop, Chris Martin, Lucio Sarno, and Giorgio Valente. Any remaining errors are ours. *Correspondence author, Department of Economics, City University, Northampton Square, London EC1V OHB, UK; e-mail: c.milas@city.ac.uk Received October 2002; Accepted April 2003 I Ilias Lekkos is in the Credit Risk Management Division at Halifax-Bank of Scotland Treasury Services in London, United Kingdom I Costas Milas is a Senior Lecturer in the Department of Economics at City University in the United Kingdom 222Lekkos and Milas in U.S. and UK swap spreads; one is characterized by a "flat" term structure of U.S. interest rates and the other is characterized by an "upward" sloping U.S. term structure. In addition, we show that there exist significant asymmetries on the impact of the common risk factors on the U.S. and UK swap spreads. Shocks to UK oriented risk factors have a strong effect on the U.S. swap markets during the "flat" slope regime but a very limited effect otherwise. On the other hand, U.S. risk factors have a significant impact on the UK swap markets in both regimes.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Common risk factors in the U.S. and UK interest rate swap markets: Evidence from a nonlinear vector autoregression approach

Lekkos

Milas

2004

Journal of Futures Markets

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“…All in all this will result in a negative relationship between the level of the yield curve and the swap rate. 3 Lekkos and Milas (2001) include the variable Level in their empirical work and find that it contributes to variations in both the U.S. and the UK swap spreads, and that the relationship is negative. In addition, Subrahmanyam et al (2000) also find that the swap spread is negatively related to the level of interest rates, in the Japanese market.…”

Section: Levelmentioning

confidence: 99%

An Empirical Analysis of Factors Driving the Swap Spread

Asgharian¹,

Karlsson²

2008

JFI

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“…Other studies examining the impact of liquidity and default risk premiums on swap spreads include Brown, Harlow, and Smith (1994), Lang, Litzenberger, and Liu (1998), Sun, Sudaresan, andWang (1993), andFehle (2003). In addition to default and liquidity premiums, other economic determinants of swap spreads in prior studies consist of interest rate volatility and slope of the yield curve as they are alternative proxies of financial market risks (e.g., In, Brown, & Fang, 2003;Lekkos & Milas, 2001.…”

Section: Literature Reviewmentioning

confidence: 99%

Determinants of Japanese Yen interest rate swap spreads: Evidence from a smooth transition vector autoregressive model

Huang

Chen

Camacho

2007

Journal of Futures Markets

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This study investigates the determinants of variations in the yield spreads between Japanese yen interest rate swaps and Japan government bonds for a period from 1997 to 2005. A smooth transition vector autoregressive (STVAR) model and generalized impulse response functions are used to analyze the impact of various economic shocks on swap spreads. The volatility based on a GARCH (generalized autoregressive conditional heteroskedasticity) model of the government bond rate is identified as the transition variable that controls the smooth transition from a high volatility regime to a low volatility regime. The break We thank two anonymous reviewers and the editor, Bob Webb, for helpful comments. The views in this paper are those of the authors and do not represent the views of the Bank of Spain or the Eurosystem. point of the regime shift occurs around the end of the Japanese banking crisis. The impact of economic shocks on swap spreads varies across the maturity of swap spreads as well as regimes. Overall, swap spreads are more responsive to the economic shocks in the high volatility regime. Moreover, a volatility shock has profound effects on shorter maturity spreads, whereas the term structure shock plays an important role in impacting longer maturity spreads. Results of this study also show noticeable differences between the nonlinear and linear impulse response functions.

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Identifying the Factors that Affect Interest‐Rate Swap Spreads: Some Evidence from the United States and the United Kingdom

Cited by 58 publications

References 19 publications

Common risk factors in the U.S. and UK interest rate swap markets: Evidence from a nonlinear vector autoregression approach

Common risk factors in the U.S. and UK interest rate swap markets: Evidence from a nonlinear vector autoregression approach

An Empirical Analysis of Factors Driving the Swap Spread

Determinants of Japanese Yen interest rate swap spreads: Evidence from a smooth transition vector autoregressive model

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