Modelling Australian interest rate swap spreads by mixture autoregressive conditional heteroscedastic processes

W.S. Chan, C.S. Wong and A.H.L. Chung

Mathematics and Computers in Simulation (MATCOM), 2009, vol. 79, issue 9, 2779-2786

Abstract: The observed difference between the swap rate and the government bond yield of corresponding maturity is known as the swap spread. The swap spread reflects the risk premium that is involved in a swap transaction instead of holding risk-free government bonds. It is primarily composed of the liquidity risk premium and the credit risk premium. In recent years there has been growing interest in modelling swap spreads because the swap spread is the key pricing variable for the swap rate. The Australian interest rate swap market is the most important over-the-counter (OTC) derivative market in Australia. In this paper we apply the class of mixture autoregressive conditional heteroscedastic (MARCH) models to three (3-year, 5-year and 10-year) swap spread series in Australia. The MARCH model is able to capture both of the stylised characteristics of the observed changes of the swap spread series: volatility persistence and the dependence of volatility on the level of the data. The proposed MARCH model also allows for regime switches in the swap spreads.

Keywords: Conditional volatility; EM algorithm; MARCH model; Outliers; Regime switches (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378475408002796
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:79:y:2009:i:9:p:2779-2786

DOI: 10.1016/j.matcom.2008.07.011

Access Statistics for this article

Mathematics and Computers in Simulation (MATCOM) is currently edited by Robert Beauwens

More articles in Mathematics and Computers in Simulation (MATCOM) from Elsevier
Bibliographic data for series maintained by Catherine Liu ().