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An Empirical Analysis for Determinants of Interest Rate Swap Spread

Zhang, Ke and Liang, Bing (2008)
Department of Economics
Abstract
As one of the most popular derivatives to hedge interest rate risk, the variation of interest
rate swap spread has been studied since its advent. Nevertheless, the variables in theory
are regarded as determinant risk factors showing limited explanatory power. To
investigate further, we conducted the cointegration test on each pair of variables which
are considered in the financial and macroeconomic sense, and extend the classic
Generalized Autoregressive Conditionally Heteroscedastic (GARCH) model by
combining the Error correction model (ECM). Our testing results suggest that the changes
in the swap spread negatively correlated with the slope of the yield curves of Treasury
Securities and positively correlated with the implied volatility... (More)
As one of the most popular derivatives to hedge interest rate risk, the variation of interest
rate swap spread has been studied since its advent. Nevertheless, the variables in theory
are regarded as determinant risk factors showing limited explanatory power. To
investigate further, we conducted the cointegration test on each pair of variables which
are considered in the financial and macroeconomic sense, and extend the classic
Generalized Autoregressive Conditionally Heteroscedastic (GARCH) model by
combining the Error correction model (ECM). Our testing results suggest that the changes
in the swap spread negatively correlated with the slope of the yield curves of Treasury
Securities and positively correlated with the implied volatility of Stock market, while
other assumed determinant variables having a vague or even rather weak impact on the
swap spread in general. (Less)
Please use this url to cite or link to this publication:
author
Zhang, Ke and Liang, Bing
supervisor
organization
year
type
H1 - Master's Degree (One Year)
subject
keywords
interest rate, Swap spread, Economics, econometrics, economic theory, economic systems, economic policy, Nationalekonomi, ekonometri, ekonomisk teori, ekonomiska system, ekonomisk politik
language
English
id
1336538
date added to LUP
2008-09-15
date last changed
2010-08-03 10:51:57
@misc{1336538,
  abstract     = {As one of the most popular derivatives to hedge interest rate risk, the variation of interest
rate swap spread has been studied since its advent. Nevertheless, the variables in theory
are regarded as determinant risk factors showing limited explanatory power. To
investigate further, we conducted the cointegration test on each pair of variables which
are considered in the financial and macroeconomic sense, and extend the classic
Generalized Autoregressive Conditionally Heteroscedastic (GARCH) model by
combining the Error correction model (ECM). Our testing results suggest that the changes
in the swap spread negatively correlated with the slope of the yield curves of Treasury
Securities and positively correlated with the implied volatility of Stock market, while
other assumed determinant variables having a vague or even rather weak impact on the
swap spread in general.},
  author       = {Zhang, Ke and Liang, Bing},
  keyword      = {interest rate,Swap spread,Economics, econometrics, economic theory, economic systems, economic policy,Nationalekonomi, ekonometri, ekonomisk teori, ekonomiska system, ekonomisk politik},
  language     = {eng},
  note         = {Student Paper},
  title        = {An Empirical Analysis for Determinants of Interest Rate Swap Spread},
  year         = {2008},
}