Global financial crisis and US interest rate swap spreads

Takayasu Ito

Applied Financial Economics, 2010, vol. 20, issue 1-2, 37-43

Abstract: This article investigates the determinants of US interest rate swap spreads in the period including the financial crisis. The asymmetric impacts of the financial crisis on interest rate swap spreads are focused by dividing the whole sample period into two. Four determinants of swap spreads - default risk, the slope of yield curve, T-bill and EuroDollar (TED) spread and volatility - are chosen. The default risk measured both in Aaa and Baa corporate bonds are negatively incorporated in the period of financial crisis. The slope is positively incorporated in short- and long-term maturities in the period of financial crisis. The liquidity premium is positively incorporated in short- and long-term maturities in normal period and only in short-term maturity in the period of financial crisis. The market participants were uncertain as for the future of monetary policy by Federal Reserve Board (FRB). Thus the speculation on the path of monetary policy is considered to cause more volatility in the market. The volatility can be a positive determinant of US swap spreads in the period of financial crisis.

Date: 2010
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DOI: 10.1080/09603100903262921

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