Title
What Determines U.S. Swap Spreads? (World Bank Working Papers, 62),New
Delivery time: 8-12 business days (International)
This title examines the evolution of the U.S. interest swap market. It reviews the theory and past empirical studies on U.S. swap spreads and estimates an error correction model for maturities of 2, 5 and 10year over the period 19942004. Financial theory depicts swaps as contracts indexed on LIBOR rates, rendered almost free of counterparty default risk by marktomarket and collateralization. Swap spreads reflect the LIBOR credit quality (credit component) and a liquidity convenience premium present in Treasury rates (liquidity component). Multifactor models which were estimated on observed swap rates highlighted the central role played by the liquidity component in explaining swap spread dynamics over the past fifteen years. They also found, however, some puzzling empirical results. Statistical models, on the other hand, mainly based on market analysis, faced technical difficulties, arising from the presence of regime changes, the nonstationarity in swap spreads, and the coexistence of longterm and shorterterm determinants. Against this background, the authors applied the error correction methodology based on the concept of cointegration. They find that U.S. dollar swap spreads and the supply of U.S. Treasury bonds are cointegrated, suggesting that the Treasury supply is a key determinant on a longterm horizon. They then estimate an error correction model which integrates this longterm relationship with the influence of four shorterterm determinants: the AA spread, the repo rate, the difference between ontherun and offtherun yields, and the duration of mortgage backed securities. The error correction model fits observed swap spreads quite well over the sample period. The authors then illustrate how the same model can be used to carry out scenario analysis.
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We provide a 2-year limited warranty, from the date of purchase for all our products.
If you believe you have received a defective product, or are experiencing any problems with your product, please contact us.
This warranty strictly does not cover damages that arose from negligence, misuse, wear and tear, or not in accordance with product instructions (dropping the product, etc.).
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