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http://hdl.handle.net/2451/26889
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| Title: | Credit Risk and the Yen Interest Rate Swap Market |
| Authors: | Eom, Young Ho
Subrahmanyam, Marti G.
Uno, Jun |
| Keywords: | Credit Risk
Japanese Government Bonds Market
Swap Pricing |
| Issue Date: | Jul-2000 |
| Series/Report no.: | S-DRP-01-08 |
| 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
different 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 assumption 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 differently 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 long-term 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. |
| URI: | http://hdl.handle.net/2451/26889 |
| Appears in Collections: | Derivatives Research
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