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Swap credit risk: An empirical investigation on transaction data

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  • Cossin, Didier
  • Pirotte, Hugues

Abstract

Currency and interest rate swaps are subject to a complex, two-sided default risk. Although several theoretical papers have recently addressed the problem of pricing swap credit risk, the empirical literature is almost non-existent. This is the only study we know of that uses actual transaction data to document the effect of credit risk on swap spreads. We provide results for both interest rate and currency swaps.
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Suggested Citation

  • Cossin, Didier & Pirotte, Hugues, 1997. "Swap credit risk: An empirical investigation on transaction data," Journal of Banking & Finance, Elsevier, vol. 21(10), pages 1351-1373, October.
  • Handle: RePEc:eee:jbfina:v:21:y:1997:i:10:p:1351-1373
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    1. Gregory R. Duffee, 1995. "The variation of default risk with Treasury yields," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 29-58.
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    6. Robert A. Jarrow & Stuart M. Turnbull, 2008. "Pricing Derivatives on Financial Securities Subject to Credit Risk," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 17, pages 377-409 World Scientific Publishing Co. Pte. Ltd..
    7. Sun, Tong-sheng & Sundaresan, Suresh & Wang, Ching, 1993. "Interest rate swaps: An empirical investigation," Journal of Financial Economics, Elsevier, vol. 34(1), pages 77-99, August.
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    9. 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.
    10. Ramaswamy, Krishna & Sundaresan, Suresh M., 1986. "The valuation of floating-rate instruments : Theory and evidence," Journal of Financial Economics, Elsevier, vol. 17(2), pages 251-272, December.
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    12. Duffie, Darrell & Huang, Ming, 1996. " Swap Rates and Credit Quality," Journal of Finance, American Finance Association, vol. 51(3), pages 921-949, July.
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    14. Johnson, Herb & Stulz, Rene, 1987. " The Pricing of Options with Default Risk," Journal of Finance, American Finance Association, vol. 42(2), pages 267-280, June.
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    Citations

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    Cited by:

    1. Hubner, Georges, 2001. "The analytic pricing of asymmetric defaultable swaps," Journal of Banking & Finance, Elsevier, vol. 25(2), pages 295-316, February.
    2. SOLNIK, Bruno & COLLIN-DUFRESNE, Pierre, 2000. "On the term structure of default premia in the Swap and Libor markets," HEC Research Papers Series 704, HEC Paris.
    3. Schröder, Thomas & Dunbar, Kwamie, 2010. "Effectively Hedging the Interest Rate Risk of Wide Floating Rate Coupon Spreads," Working Papers 2010001, Sacred Heart University, John F. Welch College of Business.
    4. Takayasu Ito, 2010. "Global financial crisis and US interest rate swap spreads," Applied Financial Economics, Taylor & Francis Journals, vol. 20(1-2), pages 37-43.
    5. Hugues Pirotte, 1999. "Implementing a Structural Valuation Model of Swap Credit-Sensitive Rates," Working Papers CEB 99-001.RS, ULB -- Universite Libre de Bruxelles.
    6. Takayasu Ito, 2007. "The analysis of interest rate swap spreads in Japan," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(1), pages 1-4, January.
    7. Niffikeer, Cindy I. & Hewins, Robin D. & Flavell, Richard B., 2000. "A synthetic factor approach to the estimation of value-at-risk of a portfolio of interest rate swaps," Journal of Banking & Finance, Elsevier, vol. 24(12), pages 1903-1932, December.
    8. Avouyi-Dovi, S. & Jondeau, E., 1999. "Modelling the French Swap Spread," Working papers 65, Banque de France.
    9. Didier Cossin & Tomas Hricko & Daniel Aunon-Nerin & Zhijiang Huang, 2002. "Exploring for the Determinants of Credit Risk in Credit Default Swap Transaction Data: Is Fixed-Income Markets’ Information Suffcient to Evaluate Credit Risk?," FAME Research Paper Series rp65, International Center for Financial Asset Management and Engineering.

    More about this item

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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