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A Survey on Modeling and Analysis of Basis Spreads

  • Masaaki Fujii

    (Graduate School of Economics, University of Tokyo)

  • Akihiko Takahashi

    (Faculty of Economics, University of Tokyo)

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    The recent financial crisis has spiked the credit and liquidity premia among financial products, and significant widening of basis spreads among Libors with different tenors and currencies has been observed in interest rate markets. Our previous work, "A Note on Construction of Multiple Swap Curves with and without Collateral" has developed an arbitrage-free curve construction method with all the relevant spreads taken into account. This short note carries out a brief survey on the existing analysis of spreads' dynamics and pricing models as a preparation for the development of a model that enables us to price and hedge generic financial derivatives under the new market condition.

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    Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-697.

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    Length: 11pages
    Date of creation: Dec 2009
    Date of revision:
    Handle: RePEc:tky:fseres:2009cf697
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    1. Liu, Jun & Longstaff, Francis A. & Mandell, Ravit E., 2004. "The Market Price Of Risk In Interest Rate Swaps: The Roles Of Default And Liquidity Risks," University of California at Los Angeles, Anderson Graduate School of Management qt5z42g22g, Anderson Graduate School of Management, UCLA.
    2. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
    3. Pierre Collin-Dufresne, 2001. "On the Term Structure of Default Premia in the Swap and LIBOR Markets," Journal of Finance, American Finance Association, vol. 56(3), pages 1095-1115, 06.
    4. Duffie, Darrell & Huang, Ming, 1996. " Swap Rates and Credit Quality," Journal of Finance, American Finance Association, vol. 51(3), pages 921-49, July.
    5. Feldh├╝tter, Peter & Lando, David, 2008. "Decomposing swap spreads," Journal of Financial Economics, Elsevier, vol. 88(2), pages 375-405, May.
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