An Econometric Model of the Term Structure of Interest-Rate Swap Yields

This article develops a multi-factor econometric model of the term structure of interest-rate swap yields. The model accommodates the possibility of counterparty default, and any differences in the liquidities of the Treasury and Swap markets. By parameterizing a model of swap rates directly, we are...

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Bibliographic Details
Published in:The Journal of finance (New York) 1997-09, Vol.52 (4), p.1287-1321
Main Authors: DUFFIE, DARRELL, SINGLETON, KENNETH J.
Format: Article
Language:English
Subjects:
Credit
Credit risk
Econometric models
Econometrics
Economic models
Financial instruments
Interest rate policy
Interest rate swaps
Interest rates
Liquidity
Profit
Repurchase agreement
Statistical analysis
Stock exchange speculation
Stock returns
Studies
Swap spread
Treasury bonds
U.S.A
Yield
Yield curves
Zero coupon bonds
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Summary:This article develops a multi-factor econometric model of the term structure of interest-rate swap yields. The model accommodates the possibility of counterparty default, and any differences in the liquidities of the Treasury and Swap markets. By parameterizing a model of swap rates directly, we are able to compute model-based estimates of the defaultable zero-coupon bond rates implicit in the swap market without having to specify a priori the dependence of these rates on default hazard or recovery rates. The time series analysis of spreads between zero-coupon swap and treasury yields reveals that both credit and liquidity factors were important sources of variation in swap spreads over the past decade.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.1997.tb01111.x