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The Journal of Fixed Income

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Primary Article

Modeling the Determinants of Swap Spreads

Rob Brown, Francis In and Victor Fang
The Journal of Fixed Income Summer 2002, 12 (1) 29-40; DOI: https://doi.org/10.3905/jfi.2002.319316
Rob Brown
Professor of finance at the University of Melbourne in Parkville, Australia.
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  • For correspondence: rlbrown@unimelb.edu.au
Francis In
A senior lecturer in finance at Monash University in Clayton, Australia.
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  • For correspondence: francis.in@buseco.monash.edu.au
Victor Fang
A lecturer in finance at Monash University in Caulfield, Australia.
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  • For correspondence: victor.fang@buseco.monash.edu.au
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Abstract

The authors use a multivariate exponential generalized autoregressive conditional heteroscedasticity (EGARCH) model to investigate the determinants of interest rate swap spreads in Australia. They find that changes in the spread are negatively related to changes in the level of default-free interest rates and to changes in the slope of the term structure. The curvature factor of the term structure is found to be a poor proxy in explaining changes in the spread. There is a strong and significant volatility interaction among spreads for swaps of different terms to maturity. The process for the conditional variance of the spread is highly persistent across all maturities. Credit risk but not swap market liquidity is also an important source of variation in Australian swap spreads.

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The Journal of Fixed Income
Vol. 12, Issue 1
Summer 2002
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Modeling the Determinants of Swap Spreads
Rob Brown, Francis In, Victor Fang
The Journal of Fixed Income Jun 2002, 12 (1) 29-40; DOI: 10.3905/jfi.2002.319316

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Modeling the Determinants of Swap Spreads
Rob Brown, Francis In, Victor Fang
The Journal of Fixed Income Jun 2002, 12 (1) 29-40; DOI: 10.3905/jfi.2002.319316
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