Interest Rate Swaps: Stylized Facts and Behavioral Dynamics

Interest rate swaps play an important role in global finance. This paper analyzes the stylized facts about interest rate swaps and the dynamics of swap yields denominated in various currencies. John Maynard Keynes hypothesized that a central bank’s actions influence the long-term interest rate through the effect of its policy rate(s) on the current short-term interest rate. Recent empirical research on modeling interest rate swap yields supports that the Keynesian hypothesis extends to the behavior of interest rate swaps denominated in hard currencies, as well as selected emerging market currencies. This paper summarizes the findings of the empirical research on interest rate swaps from a Keynesian perspective, emphasizing the central bank’s vital role in interest rate dynamics in the OTC derivatives markets. It would be useful to supplement the econometric analysis of swap yields with the study of swaps markets’ institutional frameworks because their historical, social, and legal factors also affect their behavior dynamics, as well as how swaps are applied for both hedging and speculating.