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What Drives Swap Spreads, Credit or Liquidity?

  • Ying Huang

    (Graduate Center, CUNY)

  • Salih Neftci

    ()

    (Professor, Economics Department, Graduate Center, CUNY)

  • Ira Jersey

    (Credit Suisse First, Boston, New York)

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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File URL: http://www.icmacentre.ac.uk/pdf/discussion/DP2003-05.pdf
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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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Web page: http://www.henley.reading.ac.uk/

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  1. 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.
  2. 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.
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