The Driving Force of Swap Spreads

The interest rate swap is one of the most popular topics that researchers work on since 1980s. Even though there are so many research papers that are about the determinant factors of interest rate swap, it shows the limited explanation. I have conducted the cointegration test on each pair of variables based on the financial and macroeconomic theory. My testing results show that the interest rate swap spread is correlated with default premium in corporate bond market and the government budget deficit index while other assumed determinant variables have weak impacts on the swap spread.


1. Introduction
1.1 Background
1.2 Objective of this Paper
1.3 Disposition of this paper
2. Literature Review
2. 1 Basics of interest rate swaps
2.2 Interest rate swap spread background
2.3. Literature Results
3.1 Source Data
3.2 Interest rate swap spread
3.3 Explanatory variables
4. Methodology
4.1. Hypotheses:
4.2 Explanation of Variables
4.3. The GARCH model
4.4 The Cointegration Model
4.4.1 Methodology of Cointegration
4.4.2 Cointegration analysis
4.3 GARCH Model with three different versions of Error Correction Terms
4.3.1.Error Correction Model 1 (ECM1)
4.3.2 Error Correction Model 2 (ECM2)
4.3.3 Error Correction Model 3 (ECM3)
5. Empirical results
5.1 Unit Root Test Result
5.2 Correlation among explanatory variables
5.3 Analysis of Hypothesis Tests
6. Conclusion
7. Acknowledgements

Author: Bing Liang

Source: Blekinge Institute of Technology

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