Ripple Effects, Long-Run Relationship and Dynamic Corrections among Interest Rate Swap Spreads

Abstract

This study tests the ripple effects, long-run convergence, and dynamic correlation structures of swap spreads of varying maturities. The study employs the ARDL bounds-testing approach and the asymmetric DCC methodology on daily data spanning 15 years. The results largely support the presence of the ripple effect and the long-run convergence of swap spreads of differing maturities. However, there are significant variations in the strength and speed of adjustment towards long-run equilibrium relationship among diverse maturities. Most pairs of swap spreads exhibit strong, symmetric, highly persistent, and time-varying dynamic co-movements, suggesting interdependence and information flow among the swap spreads of varied maturities.