The dynamics of sovereign yields over swap rates in the Eurozone market

Lior David-Pur, Koresh Galil () and Mosi Rosenboim

International Review of Financial Analysis, 2020, vol. 72, issue C

Abstract: We explore the dynamics of the adjusted swap spread (calculated as the difference between the swap rate and sovereign yields over the credit default swap premium) in the Eurozone market by studying three markets simultaneously: 1) sovereign bonds, 2) credit default swaps (CDS), and 3) swap rates. We find a strong relationship between the markets. Specifically, based on the no-arbitrage argument, we show that the difference between the Euribor and Repo rates is a key driver of the adjusted swap spread. However, illiquidity premiums and systemic risk also play an essential role in times of economic stress and for less creditworthy countries. The findings also shed light on the recent negative swap spreads puzzle in the United States.

Keywords: Swap market; Eurozone sovereign bond market; Swap spread; Euribor repo spread (search for similar items in EconPapers)
JEL-codes: G12 G13 G15 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:72:y:2020:i:c:s1057521920302222

DOI: 10.1016/j.irfa.2020.101578

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