What determines the yen swap spread?

A.S.M. Azad, Jonathan Batten and Victor Fang

International Review of Financial Analysis, 2015, vol. 40, issue C, 1-13

Abstract: We investigate if Japanese yen denominated interest rate swap spreads price risks in addition to liquidity and default risk. These additional risks include: the time-varying correlation between interest rates of different types and maturities; business cycle risk; and market skewness risk. Our analysis, over a number of different maturities and sample periods, supports the existence of an additional risk premium. We also show that the time-varying correlation between short term market interest rates (e.g., TIBOR) and the longer term Government bond yield (e.g., Gensaki) is of particular importance. Japanese yen swap spreads are shown to contain both pro-cyclical and counter-cyclical elements of business cycle risk, positive risk premia for skewness risk and variable risk premia for correlation risk (between fixed and floating interest rates).

Keywords: Correlation risk; Business cycles; Interest rate swaps; Market skewness; Swap spread puzzle; Systematic risk; Japan; Yen swap markets; TIBOR (search for similar items in EconPapers)
JEL-codes: C22 C51 G12 G15 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:40:y:2015:i:c:p:1-13

DOI: 10.1016/j.irfa.2015.04.001

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