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

✍ Scribed by Frank Fehle

Publisher
John Wiley and Sons
Year
2003
Tongue
English
Weight
229 KB
Volume
23
Category
Article
ISSN
0270-7314

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✦ Synopsis

Abstract

This article contains both a theoretical and an empirical analysis of the components of interest rate swap
spreads 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 swap
market incorporating debt market imperfections and corporate financing choices is used to explain participation
by both swap buyers and sellers. The model also motivates an empirical relationship between swap spreads and the
slope of the risk‐free term structure. The article then provides empirical evidence on the
cross‐sectional and time‐series variation of swap spreads in seven international markets. The
evidence is consistent with the suggested components across both markets and swap maturities as well as over
time. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:347–387, 2003

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