An Empirical Examination of U.S. Dollar Swap Spreads
Author | : Bernadette A. Minton |
Publisher | : |
Total Pages | : |
Release | : 1999 |
ISBN-10 | : OCLC:1291270499 |
ISBN-13 | : |
Rating | : 4/5 (99 Downloads) |
Download or read book An Empirical Examination of U.S. Dollar Swap Spreads written by Bernadette A. Minton and published by . This book was released on 1999 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The structure of a plain vanilla interest rate swap is such that its cash flows can be replicated by a portfolio of two bonds or by a portfolio of short-term interest rate futures contracts. Swap pricing, therefore, should be closely related to the pricing of these underlying instruments. This paper estimates the determinants of U.S. dollar swap spreads to test whether the pricing relationships between swaps, bonds and futures hold. Swap spreads are positively related to interest rate volatility and the corporate quality spread, and negatively related to the term spread and level of the interest rate. Short-term over-the-counter swap rates are highly correlated with swap rates calculated using Eurodollar futures prices. While exchange-traded implied swap spreads are statistically related to yield curve factors, they are not related to corporate quality spreads. Overall, the results in this paper suggest that swaps are not equivalent to portfolios of bonds or futures contracts due in part to the differences in the credit risk in each instrument.