Links among Interest Rate Swap Markets

Abstract

Variance decomposition and impulse response analysis of the links in swap spreads in the U.S., the U.K., and Japan indicates that across all swap maturities and in all three currencies, the slope of the risk-free term structure makes the greatest contribution, and the contribution is greater for longer terms to maturity. The contributions of interest rate volatility, the liquidity premium, and the corporate spread are small or negligible. There is a significant bidirectional influence (particularly through term structure slope) between the U.S. and U.K. swaps markets across maturities. The U.S. and U.K. swap markets have no major impact on the Japanese swaps market, and the Japanese market has a negligible influence on the U.S. and U.K. swaps markets.