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Are Swap and Bond Markets Alternatives to Each Other in Turkey?


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  • Murat Duran
  • Doruk Kucuksarac


Cross currency swaps are agreements to exchange interest payments and principals denominated in two different currencies and usually have one leg fixed and the other floating. The interest rate on the fixed leg is closely related to the yields on the securities of the same tenure and currency. In Turkey, cross currency swaps and treasury bonds have similar cash flow structures and risk profiles. Hence these markets are usually considered as alternatives to each other. In this context, using daily data for the period August 2008 – January 2012, this study investigates the level relationship between the cross currency swap rates and treasury bond yields of 1-month to 4-year tenures by the cointegration testing procedure suggested by Pesaran, Shin and Smith (PSS). Our empirical results indicate that, at shorter tenures, cross currency swap rates and treasury bond yields have a one-to-one long-run equilibrium relationship and hence the deviations from the equilibrium are quickly arbitraged away. On the other hand, the relationship becomes weaker as the tenure exceeds 6 months and completely disappears after 1 year. We also carry out some robustness checks and the results obtained from these analyses support our initial findings.

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Bibliographic Info

Paper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 1223.

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Date of creation: 2012
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Handle: RePEc:tcb:wpaper:1223

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Related research

Keywords: covered interest parity; limits to arbitrage; bond market; currency swap; cointegration;

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