Determinants of Swap Spreads in a Developing Financial Market: Evidence from Finland

This paper presents empirical evidence on the determinants of swap spreads in Finland using four years of data. Spreads exhibit a significant negative relationship with the amount of fixed rate deposits with banks, which reflects the importance of banks in the Finnish capital markets. Spreads are positively linked to business cycle and market risk factors such as the slope of the yield curve and the volatility of interest rates. The influence of hedging costs has become increasingly important over time, especially in longer dated swaps. A relationship is also observed between swap spreads and the external value of the currency.