Abstract
This paper empirically shows that the long-term persistence of negative swap spreads, which was unique phenomenon only in Korean interest rate swap market, could be caused by the covered interest rate arbitrage trading by foreign investors in Korean market. It concretely shows the fixed rates of currency swap, whose decreases expand the incentive for arbitrage trading by foreign investors, to positively influence the interest rate swap spreads. The empirical results suggests that the foreign factors might make more effect on the interest rate swap market than the spot bond market, resulting in the negative interest rate swap spreads. The results implies that, the asset pricing for interest rate swap needs to consider the foreign factors under the circumstances of open capital market.
Keywords
Citation
Won, S. (2010), "Covered Interest Rate Arbitrage Trading and Negative Spreads of Interest rate Swap in Korea", Journal of Derivatives and Quantitative Studies: 선물연구, Vol. 18 No. 1, pp. 43-75. https://doi.org/10.1108/JDQS-01-2010-B0002
Publisher
:Emerald Publishing Limited
Copyright © 2010 Emerald Publishing Limited
License
This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode