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Author: Young Ho Eom Publisher: ISBN: Category : Languages : en Pages : 37
Book Description
We investigate the Japanese yen and U.S. dollar interest rate swap markets during the period 1990-2000, by examining the spreads of the swap rates over comparable treasury yields (on Japanese Government Bonds (JGBs) and U.S. Treasury bonds, respectively) for different maturities. We then analyze the transmission of shocks in the swap spreads and their volatilities from one market to the other. Our main findings are: (1) the correlations between the yen and dollar interest swap spreads are low, indicating that the credit risk factor is country-specific, rather than global in nature, (2) the changes in the dollar interest rate swap spreads quot;Granger-causequot; the changes in the spreads of yen interest rate swaps for the long (10-year) maturities, but the causality does not run the other way, (3) yen swap spreads are highly correlated with the interest rate differentials between the two markets, and the interest rate differentials have a significant impact on subsequent movements in the yen swap spreads, (4) the transmission of the volatility of swap spreads is strong from the dollar to the yen markets and relatively weak in the other direction, and (5) shocks to the dollar swap spread have an asymmetric impact on the volatilities of the spreads in both the yen and dollar swap markets, i.e., an increase in the dollar swap spread leads to higher future volatility of the spreads in both swap markets, but a decrease does not. These empirical results suggest that specific institutional aspects, such as illiquidity and market frictions, may have affected the yen interest swap market more than its dollar counterpart.
Author: Young Ho Eom Publisher: ISBN: Category : Languages : en Pages : 37
Book Description
We investigate the Japanese yen and U.S. dollar interest rate swap markets during the period 1990-2000, by examining the spreads of the swap rates over comparable treasury yields (on Japanese Government Bonds (JGBs) and U.S. Treasury bonds, respectively) for different maturities. We then analyze the transmission of shocks in the swap spreads and their volatilities from one market to the other. Our main findings are: (1) the correlations between the yen and dollar interest swap spreads are low, indicating that the credit risk factor is country-specific, rather than global in nature, (2) the changes in the dollar interest rate swap spreads quot;Granger-causequot; the changes in the spreads of yen interest rate swaps for the long (10-year) maturities, but the causality does not run the other way, (3) yen swap spreads are highly correlated with the interest rate differentials between the two markets, and the interest rate differentials have a significant impact on subsequent movements in the yen swap spreads, (4) the transmission of the volatility of swap spreads is strong from the dollar to the yen markets and relatively weak in the other direction, and (5) shocks to the dollar swap spread have an asymmetric impact on the volatilities of the spreads in both the yen and dollar swap markets, i.e., an increase in the dollar swap spread leads to higher future volatility of the spreads in both swap markets, but a decrease does not. These empirical results suggest that specific institutional aspects, such as illiquidity and market frictions, may have affected the yen interest swap market more than its dollar counterpart.
Author: A. S. M. Sohel Azad Publisher: ISBN: Category : Languages : en Pages : 46
Book Description
Using interest rate swap yield and spread data the linkages and volatility transmission between three major international swap markets: Japan, UK and the US are investigated. The volatilities of the swap yield and spreads are decomposed into long and short term components enabling an assessment to be made of the strength and direction of the volatility transmission process between the three markets. Strength is measured through the dynamic correlation between the long and short-term components, while direction is measured through the causality of these components. The contagion effects of key economic events are also considered. The paper presents three key findings. First, cross-market correlations of both short and long-term components between Japan and the US, and Japan and the UK are very low, which is consistent with weak integration. This would motivate international investors to take advantage of the differential between the lower long-term yields of Japanese Government bonds and the higher long-term yields of US bonds. On the other hand the cross-market correlations between the UK and the US are high, which is consistent with strong integration. Second, contagion exists in both the long and short-term volatility components of the swap spread, but not on the swap rates. Third, in terms of the direction of transmission, the volatility spillovers (both components) are mostly multidirectional between the markets.
Author: Publisher: ISBN: Category : Languages : en Pages :
Book Description
This paper examines how risk in trading activity can affect the volatility of asset prices. We look for this relationship in the behavior of interest rate swap spreads and in the volume and interest rates of repurchase contracts. Specifically, we focus on convergence trading, in which speculators take positions on a bet that asset prices will converge to normal levels. We investigate how the risks in convergence trading can affect price volatility in a form of positive feedback that can amplify shocks in asset prices. In our analysis, we see empirical evidence of both stabilizing and destabilizing forces in the behavior of interest rate swap spreads that can be attributed to speculative trading activity. We find that the swap spread tends to converge to a long-run level, although trading risk can sometimes cause the spread to diverge from that level. -- convergence trading ; interest rate swaps ; swap spread ; repurchase contracts ; trading risk ; volatility of asset prices
Author: Vineer Bhansali Publisher: ISBN: Category : Languages : en Pages : 28
Book Description
We develop a simple integrated model for the term structure of swap spreads. We begin with a model for explaining the dynamics of the riskless treasury curve in terms of two factors. We add to the basic model additional inputs that describe the evolution of the implied hazard rate intensity for interest rate swaps. Based on the model, we can derive closed form expressions for observables such as the shape of the term structure of swap spreads, term structure of volatilities and correlations. Our model is economically motivated, and is appealing in its simplicity and robustness in being able to explain the dynamics of the swap spread term structure in both normal and stressed markets. We apply the technique to swap-spread term structures for various international markets.
Author: Richard R. Flavell Publisher: John Wiley & Sons ISBN: 047072191X Category : Business & Economics Languages : en Pages : 393
Book Description
"Richard Flavell has a strong theoretical perspective on swaps with considerable practical experience in the actual trading of these instruments. This rare combination makes this welcome updated second edition a useful reference work for market practitioners." —Satyajit Das, author of Swaps and Financial Derivatives Library and Traders and Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives Fully revised and updated from the first edition, Swaps and Other Derivatives, Second Edition, provides a practical explanation of the pricing and evaluation of swaps and interest rate derivatives. Based on the author’s extensive experience in derivatives and risk management, working as a financial engineer, consultant and trainer for a wide range of institutions across the world this book discusses in detail how many of the wide range of swaps and other derivatives, such as yield curve, index amortisers, inflation-linked, cross-market, volatility, diff and quanto diffs, are priced and hedged. It also describes the modelling of interest rate curves, and the derivation of implied discount factors from both interest rate swap curves, and cross-currency adjusted curves. There are detailed sections on the risk management of swap and option portfolios using both traditional approaches and also Value-at-Risk. Techniques are provided for the construction of dynamic and robust hedges, using ideas drawn from mathematical programming. This second edition has expanded sections on the credit derivatives market – its mechanics, how credit default swaps may be priced and hedged, and how default probabilities may be derived from a market strip. It also prices complex swaps with embedded options, such as range accruals, Bermudan swaptions and target accrual redemption notes, by constructing detailed numerical models such as interest rate trees and LIBOR-based simulation. There is also increased discussion around the modelling of volatility smiles and surfaces. The book is accompanied by a CD-ROM where all the models are replicated, enabling readers to implement the models in practice with the minimum of effort.
Author: A.S.M. Sohel Azad Publisher: ISBN: Category : Languages : en Pages : 434
Book Description
This thesis focuses on the linkages between volatility of interest rate swaps (hereafter, IRS) and macroeconomic risk, cross-border linkages of swap markets from two-factor volatility models, and the influence of three additional risk factors on swap spreads. In order to investigate these, the thesis presents three empirical research essays that all revolve around a common theme: volatility and risk modelling in interest rate swaps. First research essay, presented in Chapter 3, explores whether and how the volatility of swap yield curves is related to macroeconomic risk. The methodology in this essay is based on a recent Spline-GARCH model, multivariate regression, principal component analysis and Granger causality. The empirical analysis is conducted on a sample of daily data for the period between 1987 and 2010 from three major swap markets namely, Japan, the UK and the US. The empirical analysis reveals two important findings. First, using "low-frequency" volatility extracted from aggregate volatility shocks of the three swap markets the analysis suggests that this low-frequency IRS volatility has strong and (mostly) positive association with most of the macroeconomic risk proxies. This relationship between the macroeconomic risks and IRS volatility varies slightly across the different swap maturities but is robust to alternative volatility specifications, namely C-GARCH model and model-free realized volatility. This finding is fairly consistent with the argument that the greater the macroeconomic risk the greater is the use of derivative instruments to hedge or speculate. Second, to explore the dynamic interaction including lead-lag relationship, the study finds that it is the low-frequency (IRS) volatility that Granger causes most of the macroeconomic risk proxies. This finding is, nonetheless, consistent with the argument that, as forward looking instrument, IRS has predictive power to forecast the changes in macroeconomic risk. Motivated by these findings, an empirical analysis is done on reverse regression in which macroeconomic risk proxies and their principal components are regressed on low-frequency volatility of swaps. The findings are encouraging for those who would like to use swaps in predicting macroeconomic risk. Second research essay, presented in Chapter 4, explores whether the observed relationship between macroeconomic risk proxies and volatility of swap market can be extended to investigate the cross-border linkages of swap markets. The mixed and inconclusive evidence on volatility transmission and swap market integration motivated this essay to investigate this issue from different approach. In particular, using the decomposed volatilities (long-term and short-term), this essay examines the financial integration and volatility linkages of three major swap markets, namely Japan, the UK and the US. To facilitate empirical investigation, a step-by-step approach is proposed in measuring volatility transmission and financial linkages including dynamic correlations, contagion and causality of volatility components. These findings have important implications for portfolio risk diversifications in swaps.Third research essay, presented in Chapter 5, exploits the puzzle with regard to determinants and components of swap spreads. This essay argues that in addition to default risk and liquidity risk, three risk factors namely, business cycle risk, market skewness risk and correlation risk contain significant information in determining the swap spreads. Using the GMM approach, this essay provides empirical support of risk premia related to these three risk factors in addition to default and liquidity risk premia. The results are robust to sub-sample analysis.
Author: John Kambhu Publisher: ISBN: Category : Languages : en Pages : 13
Book Description
While trading activity is generally thought to play a central role in the self-stabilizing behavior of markets, the risks in trading on occasion can affect market liquidity and heighten asset price volatility. This article examines empirical evidence on the limits of arbitrage in the interest rate swap market. The author finds both stabilizing and destabilizing forces attributable to leveraged trading activity. Although the swap spread tends to converge to its fundamental level, it does so more slowly or even diverges from its fundamental level when traders are under stress, as indicated by shocks in hedge fund earnings and the volume of repo contracts. In addition, repo volume falls when convergence trading risk is higher, and reflects shocks that destabilize the swap spread. The behavior of repo volume in particular points to how trading risk affects market liquidity and asset price volatility.
Author: Young Ho Eom
Author: Young Ho Eom
Author: A. S. M. Sohel Azad
Author: 3/4dm̀ Kb̤or
Author: Ádám Kóbor
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Author: Vineer Bhansali
Author: Richard R. Flavell
Author: Julian Alworth
Author: A.S.M. Sohel Azad
Author: John Kambhu