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Japanese Interest Rate Swap Pricing

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  • Junji Shimada
  • Toyoharu Takahashi
  • Tatsuyoshi Miyakoshi
  • Yoshihiko Tsukuda

Abstract

This paper investigates the two questions on the pricing of interest rate swap in the Japanese market by applying a time varying coefficient regression model: (i) Do the risk factors which determine the spread in the US market also hold in the Japanese market? (ii) How does the degree of sensitivity of the swap spread to the risks vary over time (in particular, focusing on the impact of the "Asian financial crisis" and the "global financial crisis")? Both default risk of counter party and liquidity risk price the swap spread in the Japanese interest rate swap market. But, influences to swap pricing of these two risks are somewhat different. Roughly speaking, liquidity risk plays more important role in shorter maturities and default risk is more important for longer maturities. The above two kind of risks play different roles during the financial crises of the "Asian financial crisis" in 1997 to 1998 and the "global financial" crisis from 2007. The liquidity risk was a key factor in the former crisis, but not in the latter crisis for longer maturities. Default risk of LIBOR does not clearly display any determinants in the Japanese markets.

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File URL: http://hdl.handle.net/10097/55400
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File URL: http://ir.library.tohoku.ac.jp/re/bitstream/10097/55400/1/terg253.pdf
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Bibliographic Info

Paper provided by Graduate School of Economics and Management, Tohoku University in its series TERG Discussion Papers with number 253.

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Length: 26 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:toh:tergaa:253

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  1. Rockinger, Michael & Urga, Giovanni, 2001. "A Time-Varying Parameter Model to Test for Predictability and Integration in the Stock Markets of Transition Economies," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(1), pages 73-84, January.
  2. Sheridan Titman, 1990. "Interest rate swaps and corporate financing choices," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  3. Afonso, António & Strauch, Rolf, 2004. "Fiscal policy events and interest rate swap spreads: evidence from the EU," Working Paper Series 0303, European Central Bank.
  4. In, Francis & Brown, Rob & Fang, Victor, 2003. "Modeling volatility and changes in the swap spread," International Review of Financial Analysis, Elsevier, vol. 12(5), pages 545-561.
  5. Cooper, Ian A & Mello, Antonio S, 1991. " The Default Risk of Swaps," Journal of Finance, American Finance Association, vol. 46(2), pages 597-620, June.
  6. Rockinger, Michael & Urga, Giovanni, 2000. "The Evolution of Stock Markets in Transition Economies," Journal of Comparative Economics, Elsevier, vol. 28(3), pages 456-472, September.
  7. Charles S. Morris & Robert Neal & Douglas Rolph, 1998. "Credit spreads and interest rates : a cointegration approach," Research Working Paper 98-08, Federal Reserve Bank of Kansas City.
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