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Identifying the Factors that Affect Interest‐Rate Swap Spreads: Some Evidence from the United States and the United Kingdom
Author(s) -
Lekkos Ilias,
Milas Costas
Publication year - 2001
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.1803
Subject(s) - interest rate swap , swap (finance) , market liquidity , bond , economics , monetary economics , variance swap , treasury , government bond , financial economics , foreign exchange swap , volatility (finance) , maturity (psychological) , volatility swap , interest rate , implied volatility , finance , geography , interest rate parity , psychology , developmental psychology , archaeology
We assess the ability of the factors proposed in previous research to account for the stochastic evolution of the term structure of the U.S. and U.K. swap spreads. Using as factor proxies the level, volatility, and slope of the zero‐coupon government yield curve as well as the Treasury‐bill—London Interbank Offer Rate (LIBOR) spread and the corporate bond spread, we identify a procyclical behavior for the short‐maturity U.S. swap spreads and a countercyclical behavior for longer maturity U.S. swap spreads. Liquidity and corporate bond spreads are also significant, but their importance varies with maturity. The liquidity premium is more important for short‐maturity swap spreads, although the corporate bond spread affects long‐maturity swap spreads. For the United Kingdom, swap spreads are countercyclical across maturities. In addition, we find that shocks to the liquidity premium are more significant for long‐maturity swaps and that the links between corporate bond markets and swap markets are much stronger than in the United States. When we look at the links between U.S. and U.K. swap markets, we identify a significant influence of the U.S. factors on the U.K. swap spreads across maturities. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:737–768, 2001