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|Title: ||Credit Risk and the Yen Interest Rate Swap Market|
|Authors: ||Eom, Young Ho|
Subrahmanyam, Marti G.
|Keywords: ||Credit Risk|
Japanase Government Bonds market
|Issue Date: ||Jul-2001|
|Series/Report no.: ||FIN-01-042|
|Abstract: ||In this paper, we investigate the pricing of Japanese yen interest rate swaps during the
period 1990-96. We obtain measures of the spreads of the swap rates over comparable
Japanese Government Bonds (JGBs) for di erent maturities and analyze the relationship
between the swap spreads and credit risk variables.
Our empirical results in the yen swap market indicate that: 1) the commonly-used as-
sumption of lognormal default-free interest rates and swap spreads is strongly rejected by the data, 2) the term structure of swap spreads displays a humped-shape, and 3) the shocks in the yen swap spread are negatively correlated with the shocks in the comparable default-free spot rates, especially for longer maturities.
Our analysis also indicates that yen swap spreads behaved very di erently from the credit spreads on Japanese corporate bonds in the early nineties. In contrast to Japanese corporate bonds, we find that the yen swap spread is also significantly related to proxies for the longterm credit risk factor. Furthermore, the swap spread is negatively related to the level and slope of the term structure and positively related to the curvature, indicating that the credit
\optionality" is priced in the swap rate. Thus, overall, the yen swap market was sensitive to
credit risk during the period of our study.|
|Appears in Collections:||Economics Working Papers|
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