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The Journal of Fixed Income

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Primary Article

Predicting the Ten-Year LIBOR Swap Spread

The Role and Limitations of Rick/Cheap Analysis

Joseph R. Prendergast
The Journal of Fixed Income Winter 2000, 10 (3) 86-99; DOI: https://doi.org/10.3905/jfi.2000.319276
Joseph R. Prendergast
A senior associate in the Investment Management Group at Smith Breeden Associates in Chapel Hill, North Carolina.
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Abstract

Wall Street brokers and portfolio managers frequently use regressions of spread levels on contemporaneous market variables to perform relative value analysis. The regression residual is intended to capture market disequilibrium. If one expects the disequilibrium to be resolved, future spread changes can be inferred from the residual. This approach has two shortcomings. First, no explicit prediction of the spread change over a fixed horizon is made. Second, the spread is expected to revert to the fitted value of the rich/cheap levels regression only if the

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The Journal of Fixed Income
Vol. 10, Issue 3
Winter 2000
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Predicting the Ten-Year LIBOR Swap Spread
Joseph R. Prendergast
The Journal of Fixed Income Dec 2000, 10 (3) 86-99; DOI: 10.3905/jfi.2000.319276

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Predicting the Ten-Year LIBOR Swap Spread
Joseph R. Prendergast
The Journal of Fixed Income Dec 2000, 10 (3) 86-99; DOI: 10.3905/jfi.2000.319276
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