Essays on interest rate swap dynamics.
Item
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Title
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Essays on interest rate swap dynamics.
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Identifier
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AAI3127880
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identifier
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3127880
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Creator
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Huang, Ying.
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Contributor
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Adviser: Salih N. Neftci
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Date
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2004
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Language
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English
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Publisher
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City University of New York.
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Subject
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Economics, General | Economics, Finance
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Abstract
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This dissertation consists of three essays covering the dynamics of interest rate swaps. The first essay investigates the potential determinants of swap spreads. The fundamental question is whether liquidity or credit dominates the stochastic evolution of swap spreads. Significant, negative impacts from liquidity on swap spreads are found, which agrees with the prevailing view among swap traders that the swap spread serves mainly as an indicator of "market liquidity". The results also indicate that the importance of credit risk in valuing swap contracts subsides from the mid-1990s. Market volatility seems to play a relatively minor role in this setting.;In the second essay, the temporal relationship between US interest rate swap spreads, US corporate credit spreads, LIBOR and the shape of the Treasury yield curve is explored by performing cointegration tests and estimating an error correction model. One cointegrating relationship is detected, implying that a single common factor must underlie the time series behaviors of these variables and a stable long-run linear relationship exists among them. In addition, the cointegrating vector emerged from the regression documents complex dynamics between the swap and the equity markets in the US.;The linkage between the USD and HKD swap curves is examined in the third essay. It is argued that these curves contain important information, which is over and above that provided by the sovereign yield curves and the standard measures of market liquidity, LIBOR-type interest rates. The study shows that using sovereign yield curves and concentrating only on the risk premium associated with the breakdown of the currency peg is not sufficient for policy making in Hong Kong. Swap spreads and swap curves should be carefully monitored to evaluate economy wide risks and to conduct macroeconomic policy.
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Type
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dissertation
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Source
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PQT Legacy CUNY.xlsx
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degree
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Ph.D.
