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Swap Credit Risk: An Empirical Investigation on Transaction Data

  • Hugues Pirotte
  • Didier Cossin

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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Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 97-001.

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Date of creation: 1997
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Publication status: Published by:
Handle: RePEc:sol:wpaper:97-001
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  1. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
  2. 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.
  3. Yehning Chen & J. Fred Weston & Edward I. Altman, 1995. "Financial Distress and Restructuring Models," Financial Management, Financial Management Association, vol. 24(2), Summer.
  4. Hull, John, 1989. "Assessing Credit Risk in a Financial Institution's Off-Balance Sheet Commitments," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(04), pages 489-501, December.
  5. Longstaff, Francis A & Schwartz, Eduardo S, 1995. " A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July.
  6. Litzenberger, Robert H, 1992. " Swaps: Plain and Fanciful," Journal of Finance, American Finance Association, vol. 47(3), pages 831-50, July.
  7. 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.
  8. Cook, Douglas O. & Spellman, Lewis J., 1991. "Federal financial guarantees and the occasional market pricing of default risk: Evidence from insured deposits," Journal of Banking & Finance, Elsevier, vol. 15(6), pages 1113-1130, December.
  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. Jarrow, Robert A & Lando, David & Turnbull, Stuart M, 1997. "A Markov Model for the Term Structure of Credit Risk Spreads," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 481-523.
  11. Duffie, Darrell & Huang, Ming, 1996. " Swap Rates and Credit Quality," Journal of Finance, American Finance Association, vol. 51(3), pages 921-49, July.
  12. Johnson, Herb & Stulz, Rene, 1987. " The Pricing of Options with Default Risk," Journal of Finance, American Finance Association, vol. 42(2), pages 267-80, June.
  13. Jarrow, Robert A & Turnbull, Stuart M, 1995. " Pricing Derivatives on Financial Securities Subject to Credit Risk," Journal of Finance, American Finance Association, vol. 50(1), pages 53-85, March.
  14. Fama, Eugene F., 1984. "Term premiums in bond returns," Journal of Financial Economics, Elsevier, vol. 13(4), pages 529-546, December.
  15. 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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