The components of interest rate swap spreads: Theory and international evidence

Fehle, Frank

doi:10.1002/fut.10065

Cited by 38 publications

(30 citation statements)

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“…The magnitude and the propagation of the shocks are considerably more pronounced in the "flat" slope regime. Fehle (2000) attributes the positive relationship between short-term swaps and the term structure to shifts in the relative supply and demand across maturities driven by changes to the term structure. The negative relationship between long-term swaps Impulse responses for the three-year U.S. swap spread (one standard error positive shocks).…”

Section: The Effect Of Common Risk Factors On the Us And Uk Swap Spmentioning

confidence: 98%

“…In addition, Sorensen and Bollier (1994) argue that the swap spreads reflect the price of a series of European options to default implicitly held by the counterparty that is in-the-money during the initial stages of the swap contract. This research is complemented by the work of Lang, Litzenberger, and Liu (1998) and Fehle (2000), who examine how the swap market structure can affect spreads through the supply and demand for swaps.…”

Section: Introductionmentioning

confidence: 98%

“…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. slope and curvature of the default-free interest rates and the corporate bond yields are significant factors in the determination of the Japanese swap spreads, while factors like the TED spreads and short-term interest rates play only a minor role.…”

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: The Effect Of Common Risk Factors On the Us And Uk Swap Spmentioning

confidence: 98%

Section: Introductionmentioning

confidence: 98%

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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“…On the other hand, employing impulse response function and variance decomposition method, Duffie and Singleton (1997) conclude that both credit and liquidity risks have an impact on the U.S. swap zero spread, although the swap spread's own innovation accounts for the majority of the spread's variations. 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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“…Furthermore, Duffie and Singleton (1997) conclude that both credit and liquidity risks have impact on the US swap zero spread although the swap spread's own innovation accounts for the majority of the spread's variations. Other studies examining swap spreads in the same vein include Brown et al (1994), Fehle (2003), Huang and Neftci (2006), Lang et al (1998) and Sun et al (1993).…”

Section: Introductionmentioning

confidence: 96%