 The Market Price of Credit Risk: An Empirical Analysis of Interest Rate Swap SpreadsJun Liu, Francis A. Longstaff and Ravit E. Mandell University of California at Los Angeles, Anderson Graduate School of Management from Anderson Graduate School of Management, UCLA Abstract: This paper studies the market price of credit risk incorporated into one of the most important credit spreads in the financial markets: interestrate swap spreads. Our approach consists of jointly modeling the swap and Treasury term structures using a four-factor affine credit framework and estimating the parameters by maximum likelihood. We solve for the implied special financing rate for Treasury bonds and find that the liquidity component of on-the-run bond prices can be very significant. We show that most of the variation in swap spreads is driven by changes in the liquidity of Treasury bonds rather than changes in default risk. We find that there are positive credit premia in swap spreads on average. These premia, however, vary significantly over time and were negative for much of the 1990s. Since the hedge-fund crisis of 1998, credit premia have become positive and are currently at historical highs. Date: 2000-10-01 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cdl:anderf:qt0zw4f9w6 Access Statistics for this paper More papers in University of California at Los Angeles, Anderson Graduate School of Management from Anderson Graduate School of Management, UCLA Contact information at EDIRC. |
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