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Modeling volatility and changes in the swap spread |
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| Authors: | Francis In Rob BrownVictor Fang |
| Institution: | a Department of Accounting and Finance, Monash University, Clayton, Victoria 3168, Australia b Department of Finance, University of Melbourne, Parkville, Victoria 3010, Australia c Department of Accounting and Finance, Monash University, Caulfield, Victoria 3145, Australia |
| Abstract: | We investigate the determinants of changes in U.S. interest rate swap spreads using a model that explicitly allows for volatility interactions between swaps of different terms to maturity. Changes in the swap spread are found to be positively related to interest rate volatility, to changes in the default risk premium in the corporate bond market, and to changes in the liquidity premium for government securities. Swap spread changes are negatively related to changes in the level of interest rates and changes in the slope of the term structure. We also find that there is a strong and significant volatility interaction among spreads for swaps of different maturities and that the process for the conditional variance of the spread is highly persistent across all maturities. |
| Keywords: | U S swap spread Volatility EGARCH Multivariate |
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