The Lehman Brothers Swap Indexes

Abstract

This article discusses two families of total return indexes based on swaps. Bellwether swap indexes track the performance of swaps with specific maturities. Mirror swap indexes provide excess returns of popular Lehman sector indexes with respect to swaps. The results show that swap spreads are highly correlated with corporate spreads, except when the yield curve is exceptionally steep. For the Lehman Aggregate Index, the lowest tracking error is obtained if Treasury futures and swaps, respectively, are used to replicate the Treasury and spread portions of the index.