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What Drives Swap Spreads, Credit or Liquidity?

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Author Info

  • Ying Huang

    (Graduate Center, CUNY)

  • Salih Neftci

    ()
    (Professor, Economics Department, Graduate Center, CUNY)

  • Ira Jersey

    (Credit Suisse First, Boston, New York)

Abstract

This paper investigates the determinants of swap spreads. Compared with previous work done in this area, such as the seminal paper by Duffie and Singleton (1997), the paper includes daily credit spreads data in the time series framework. The issue is whether “liquidity” or “credit” (or both) is the main determinant of swap spreads dynamics. Our results agree with the prevailing view among swap traders that swap spreads are mainly an indicator of “market liquidity”. However, the dynamics are influenced significantly by “credit” over longer horizons, although credit is not the main driving force. LIBOR rate dynamics seem to play a relatively minor role in this setting.

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Bibliographic Info

Paper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2003-05.

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Length: 38 pages
Date of creation: Dec 2002
Date of revision:
Handle: RePEc:rdg:icmadp:icma-dp2003-05

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  1. Lang, Larry H. P. & Litzenberger, Robert H. & Luchuan Liu, Andy, 1998. "Determinants of interest rate swap spreads," Journal of Banking & Finance, Elsevier, vol. 22(12), pages 1507-1532, December.
  2. Duffie, Darrell & Singleton, Kenneth J, 1997. " An Econometric Model of the Term Structure of Interest-Rate Swap Yields," Journal of Finance, American Finance Association, vol. 52(4), pages 1287-1321, September.
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Cited by:
  1. Finbarr Murphy & Bernard Murphy, 2012. "A vector-autoregression analysis of credit and liquidity factor dynamics in US LIBOR and Euribor swap markets," Journal of Economics and Finance, Springer, vol. 36(2), pages 351-370, April.
  2. Liu, Jun & Longstaff, Francis A. & Mandell, Ravit E., 2004. "The Market Price Of Risk In Interest Rate Swaps: The Roles Of Default And Liquidity Risks," University of California at Los Angeles, Anderson Graduate School of Management qt5z42g22g, Anderson Graduate School of Management, UCLA.
  3. Fender, Ingo & Scheicher, Martin, 2009. "The pricing of subprime mortgage risk in good times and bad: evidence from the ABX.HE indices," Working Paper Series 1056, European Central Bank.
  4. Ingo Fender & Martin Scheicher, 2008. "The ABX: how do the markets price subprime mortgage risk?," BIS Quarterly Review, Bank for International Settlements, September.

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