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The components of interest rate swap spreads: Theory and international evidence
Author(s) -
Fehle Frank
Publication year - 2003
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.10065
Subject(s) - interest rate swap , swap (finance) , variance swap , libor , economics , financial economics , econometrics , libor market model , debt , foreign exchange swap , empirical research , monetary economics , volatility swap , interest rate , interest rate parity , finance , mathematics , volatility (finance) , implied volatility , statistics
This article contains both a theoretical and an empirical analysis of the components of interest rate swapspreads defined as the difference between the fixed swap rate and the risk‐free rate of equal maturity.The components are determined by expected LIBOR spreads, default risk, and market structure. A model of the swapmarket incorporating debt market imperfections and corporate financing choices is used to explain participationby both swap buyers and sellers. The model also motivates an empirical relationship between swap spreads and theslope of the risk‐free term structure. The article then provides empirical evidence on thecross‐sectional and time‐series variation of swap spreads in seven international markets. Theevidence is consistent with the suggested components across both markets and swap maturities as well as overtime. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:347–387, 2003