Linking the interest rate swap markets to the macroeconomic risk: The UK and us evidence
AbstractIn this paper we aim to link the volatility of interest rate swap (hereafter, IRS) markets to the macroeconomic risk/uncertainty of the UK and the US. In doing so, we obtain the low-frequency volatility of IRS using a recently developed Asymmetric Spline GARCH (ASP-GARCH) model of Rangel and Engle (2012). Our findings suggest a strong relationship between uncertainties of macroeconomic fundamentals and the fluctuation in swap market volatility. The association between the two is robust with respect to the choice of different alternative measures of volatility that are used in the literature on GARCH modelling. From the perspectives of practical implications, the findings suggest that policy makers should use low-frequency volatility in order to examine market responses to key macroeconomic policies, and that market participants may rely on low-frequency volatility to extract trading signals. Using such signals, hedgers could make forecast of whether they need to increase (decrease) IRS usage to hedge risk originating from macroeconomic uncertainty.
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Bibliographic InfoArticle provided by Elsevier in its journal International Review of Financial Analysis.
Volume (Year): 22 (2012)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/inca/620166
Interest Rate Swaps; Low-frequency Volatility; Macroeconomic Risk;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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- Mitra, Sovan & Date, Paresh & Mamon, Rogemar & Wang, I-Chieh, 2013. "Pricing and risk management of interest rate swaps," European Journal of Operational Research, Elsevier, vol. 228(1), pages 102-111.
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