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The purpose of this paper is to examine if the volatility in the US dollar interest rate swap market impacts the volatility of the swap rates in the Indian swap market.

The authors use GARCH, EGARCH, and TGARCH modeling to examine volatility spillover between the US and Indian interest rate swap markets.

Evidence is found of volatility transmission from the US dollar interest rate swap markets to the Indian swap markets. There is no evidence of spillover from the Indian swap markets to the US swap markets. Furthermore, the spillover impact from the US markets to the Indian markets is also asymmetric. The impact on volatility is asymmetric for one‐year swaps, but not for five‐year swaps.

Findings from this study will also identify any arbitrage opportunities that may exist between different segments of the US dollar interest rate swap markets and help to improve interest rate swap market efficiency.

If the financial market liberalization process in these nations has been successful in integrating their market into the pool of the world market, then a foreign investor would not demand a risk‐premium in the returns on deposits in these markets. The findings of this paper are also relevant for other emerging markets' policy makers, as they try to become more integrated in the global economy and try to resolve market inefficiencies and country risk so that obstacles to foreign investments can be removed.

The dynamics between five-year US Treasury bonds and interest rate swaps are examined using bivariate threshold autoregressive (BTAR) models to determine the drivers of spread changes and the nature of the lead–lag relation between the two instruments. This model is able to identify the economic – or threshold – value that market participants consider significant before realigning their portfolios. Specifically, three different regimes are identified: when the swap spread in the previous week is either high or low, the Treasury bond market leads the swap market. However, when the swap spread is low, none of the markets leads each other. Thus, yield movements are shown to be governed by the direction and magnitude of the change in the swap spread, which in turn provides an economic insight into the rebalancing between swap and bond portfolios.

Jefferson County, Alabama undertook a series of risky financial maneuvers in 2003 that included issuing large amounts of variable rate and auction rate securities as well as engaging in numerous interest rate swaps in order to lower the burgeoning costs of repairing its sewer system to comply with federal regulations. These complex financial instruments, intended to lower debt service costs on the countyʼs $3 billion in outstanding sewer warrants, led the county to financial bankruptcy in the wake of the financial markets collapse. This paper explores the choice of securities by analyzing the risk of adjustable rate securities and interest rate swaps, examining the Jefferson County case in detail, and providing some lessons for future financial management within the context of unexpected events such as the current recession.

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.

This study examines the response of Australian interest rate swap spreads to the arrival of macroeconomic news information during the economic expansion and contraction periods. We find that the impact of news announcements on swap spread change differs and largely depends on the state of the economy. The unexpected inflation rate is the only news released that has significant impact on swap spreads across all maturities during contractions and remains the important news announcement throughout the business cycles, while the unanticipated unemployment rate tends to be more relevant to 10-year swap and the unanticipated change in money supply tends to be more relevant to 4- and 7-year swaps during expansions. We also find shocks from these news surprises appear to have significant impact on the conditional volatility of the swap spread change during both economic phases. The macroeconomic shocks in general are negatively related to the conditional volatility of the swap spread change, suggesting that the newsworthy announcements tend to reduce uncertainty on the news announcement days in the swap market during expansion and contraction periods.

The purpose of this paper is to investigate volatility spillovers across the interest rate swap markets of the G7 economies, and then the authors investigate whether spillovers of swap markets contain useful information to explain subsequent stock price movements.

This study uses the short- and long-term swap spread volatility of the G7 countries to explore the spillover effects of international swap markets, and then investigates the relationship between swap and stock markets. The authors use the generalized VAR approach suggested by Diebold and Yilmaz (2012) to study spillovers of international swap markets. The Granger-causality tests are employed to examine the linkage of interest rate swap and stock markets.

This paper shows that a moderate spillover effect exists for the short- and long-term swap markets. Moreover, the results show that the short- and long-term swap markets of France and Germany have a larger impact on other countries’ swap markets than that of other countries’ swap markets on the French and German swap markets. Finally, the results indicate that the total volatility spillovers for the long-term swap markets have a larger influence on the total volatility spillover index of stock markets and the global stock market volatility than that of the short-term swap markets.

Prior literature has used impulse response and variance decomposition analyses to investigate international swap markets linkages. However, the results depend on the ordering of variables. This study uses the framework of Diebold and Yilmaz (2012) to overcome the ordering issue, and thus the authors can compute directional spillovers. This paper is the first study to explore the linkage of the total volatility spillover of swap markets and the stock markets.

The five-, 10-, and 20-year yields of Japanese government bonds (JGBs) co-move with the six- and 12-month basis swap rates under the quantitative and qualitative easing policy regime introduced by the Bank of Japan (BOJ). The 10- and 20-year JGB yields are in a one-to-one relationship with the six- and 12-month basis swap rates. A cheaper yen gives foreign investors strong incentives to buy 10- and 20-year JGBs under the quantitative and qualitative easing policy regime. A cheaper yen also gives foreign investors some incentives to buy five-year JGBs under the same regime. However, JGB yield does not co-move with basis swap rate under the negative interest rate policy regime. After the BOJ introduced the negative interest rate policy, the trend observed under the quantitative and qualitative easing policy regime changed.

This chapter explores the yield curve movements in the interest rate swap markets of four major currencies, the Japanese yen (JPY), the US dollar (USD), the pound sterling (GBP), and the Swiss franc (CHF), by principal component analysis (PCA), focusing on the explanatory power of each driver. Comparing the cumulative proportions of the first three principal components, the “level” changes seem to explain the yield curve movements far better than the “ratio” changes in the case of the JPY (96.1% vs. 38.3%) and CHF (97.2% vs. 41.9%), and they are only marginally worse for the USD (97.7% vs. 98.5%) and GBP (96.5% vs. 98.3%). In all markets, the explanatory power (proportion) of the first PC (PC1) is over 82%, and most of the movements can be explained by it. Furthermore, the explanatory power (cumulative proportion) from PC1 up to the third PC (PC3) is over 96%. Thus, it can be considered that most of the movements can be explained by the first three PCs. In addition, we investigate whether there is a structural change in yield curve movements before and after the global financial crisis of 2007–2008 (GFC). If we use daily “level” changes for the PCA, the GFC has no impact on the yield curve movements for all major currencies. The three PCs retain good explanatory power.

The purpose of this paper is to explain the rule recently published by the US Commodity Futures Trading Commission that establishes a timetable for the mandatory clearing of interest rate and credit default swaps through a clearinghouse.

The paper discusses the structure of cleared trades in swaps, the classes of interest rate and credit default swaps that are subject to mandatory clearing under the CFTC's new rule and the affirmative and negative specifications for each class, the phased approach adopted by the CFTC for the mandatory clearing compliance schedule, and the end‐user and inter‐affiliate exemptions from the mandatory clearing requirement.

“Centralized clearing,” a process in which bilaterally negotiated trades of derivatives have to be given up to a centralized clearinghouse, is a cornerstone of the new global regulatory system for derivatives. Its proponents argue that centralized clearing will help to mitigate systemic risk by helping counterparties identify and net positions. The paper outlines the clearing rules in the USA for interest rate and credit default swaps.

The paper provides expert guidance from experienced financial services lawyers.

Liquidity risk, i.e., the likelihood that a swap can be “sold” (i.e., assigned) may affect swap prices. This article addresses the importance of liquidity risk as a factor in the valuation of swaps, which are subject to default risk. The author presents a model for pricing these swaps by incorporating a proxy for liquidity risk. Using the model, the author finds that the effects of liquidity risk may partially offset the effects of default risk.