Determinants of Treasury-LIBOR Swap Spreads

D. K. Malhotra (), Vivek Bhargava () and Mukesh Chaudhry ()
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D. K. Malhotra: School of Business Administration, Philadelphia University, School House Lane and Henry Avenue, Philadelphia, PA 19144-5497, USA
Vivek Bhargava: Alcorn State University, MBA Program, 15 Campus Drive, Natchez, MS 39120, USA
Mukesh Chaudhry: Indiana University of Pennsylvania, 1011 South Drive, Indiana, PA 15705, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2005, vol. 08, issue 04, 687-705

Abstract: Using data from the Treasury versus London Interbank Offer Swap Rates (LIBOR) for October 1987 to June 1998, this paper examines the determinants of swap spreads in the Treasury-LIBOR interest rate swap market. This study hypothesizes Treasury-LIBOR swap spreads as a function of the Treasury rate of comparable maturity, the slope of the yield curve, the volatility of short-term interest rates, a proxy for default risk, and liquidity in the swap market. The study finds that, in the long-run, swap spreads are negatively related to the yield curve slope and liquidity in the swap market. We also find that swap spreads are positively related to the short-term interest rate volatility. In the short-run, swap market's response to higher default risk seems to be higher spread between the bid and offer rates.

Keywords: Interest rate swaps; basis swaps; Treasury-LIBOR swaps (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1142/S0219091505000567

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