Interest rate swaps and corporate default

Urban Jermann and Vivian Yue

No 1090, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper studies firms' usage of interest rate swaps to manage risk in a model economy driven by aggregate productivity shocks, inflation shocks, and counter-cyclical idiosyncratic productivity risk. Consistent with empirical evidence, firms in the model are fixed-rate payers, and swap positions are negatively correlated with the term spread. In the model, swaps affect firms' investment decisions and debt pricing very moderately, and the availability of swaps generates only small economic gains for the typical firm.

Date: 2013
New Economics Papers: this item is included in nep-bec, nep-dge and nep-opm
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Related works:
Journal Article: Interest rate swaps and corporate default (2018)
Working Paper: Interest rate swaps and corporate default (2013)
Working Paper: Interest Rate Swap and Corporate Default (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1090

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