What Determines U.S. Swap Spreads?

Abstract

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The housing market and the credit default swap premium in the UK banking sector: A VAR approach

“…A similar argument for the relationship between the slope of the yield curve and the future state of economic activity is made in Estrella and Hardouvelis (1991). Authors including, Fehle (2003), and Kobor et al (2005) present empirical evidence supporting the presence of a negative relationship between the CDS premium and slope of the yield curve. Apergis and Mamatzakis (2014) show that the factors including, the level of interest rates, the slope of the yield curve, whether CDS contracts are physically settled and the extent of how closely assets trade to par, tend to affect CDS premiums and make the CDS premium higher than the actual credit spread.…”

Modeling Swap Spreads in Normal and Stressed Environments

“…Finally, it has to be grounded in reality, i.e., the dynamics should be intuitive and the variables should capture the key factors that we know describe the movement of swap spreads. These factors include the level and shape of the sovereign yield curves, the relative supply of risky to riskless debt, the activity of mortgage hedgers (convexity hedging), and the movements in credit spreads (Cortes [2003]; Kobor, Shi, and Zelenko [2005]). Applying the same framework to the swap markets of multiple countries makes this task even more challenging, since we need to also be able to account for the idiosyncracies of their specific markets (for example the ALM flows in the U.K.).…”

An Empirical Analysis of Factors Driving the Swap Spread

“…According to Kobor et al (2005) a steep slope of the yield curve increases the incentive of the fixed rate bond issuers to switch from fixed to floating interest payment. This raises the demand for receiving fixed rate and reduces the demand for paying fixed-rate.…”

“…There is a general perception that the swap market experienced a structural change around 1998, see for instance Kobor et al (2005). We therefore start our sample in 1999 to circumvent potential estimation problems which may be induced by this structural change.…”