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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.

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.

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.

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.

This chapter provides a comprehensive overview of the young, but rapidly growing sovereign credit default swap (CDS) market, describes the function, trading, history, market participants, key statistical and stylized facts about CDS prices, determinants, price discovery, and risk issues.

Using a fiscal sentiment indicator, this study aims to verify whether fiscal sentiment affects the yield curve in Brazil. Since policymakers highlight the coordination between monetary and fiscal policies and the importance of fiscal policy to the expectations formation process in inflation targeting regimes, the authors also explore the transmission mechanism through inflation expectations. Hence, the study also analyzes the effect of fiscal sentiment on interest rate swap spreads through the inflation expectations channel.

Based on information obtained from official communiqués about fiscal policies issued by the Central Bank of Brazil and the Brazilian Ministry of Finance, the study builds a fiscal sentiment indicator. The econometric strategy to verify whether fiscal sentiment is related to the short tail of the yield curve is based on time series analysis through ordinary least squares and generalized method of moments estimates. In turn, to estimate the transmission mechanism through inflation expectations, the model uses interaction terms between fiscal sentiment and inflation expectations.

The results suggest a more optimistic (pessimistic) fiscal sentiment reduces (increases) swap spreads. The findings reveal that improvements in fiscal credibility and a more optimistic fiscal sentiment are able to reduce the positive marginal effect that inflation expectations variations have on interest rate swap spreads.

This study contributes to the literature, as, to the best of authors’ knowledge, it is the first to analyze the content of the communiqués related to fiscal policy, and based on this content, it extracts the sentiment related to the fiscal environment and analyzes the effect of this sentiment on the yield curve. Besides, different from existing studies that analyze the effect of fiscal backward-looking aspects (such as public debt, budget balance, taxes and public spending) on the yield curve, this study investigates forward-looking aspects related to fiscal policy (such as fiscal credibility and fiscal sentiment).

When extended to sovereign issuers, the Merton‐type structural model suggests a negative relationship between sovereign credit default swap (CDS) spreads and stock prices. In practice, capital structure arbitrage that exploits such relationships should foster the integration of CDS and the stock market and improve price discovery. This paper studies the dynamic relationship between sovereign CDS spreads and stock prices for seven Asian countries for the period from January 2001 to February 2007. We find a strong negative correlation between the CDS spread and the stock index for most Asian countries. A long‐run equilibrium price relationship is found for China, Korea, and Thailand. The limited integration in other countries may arise from market frictions and model applicability. In terms of price discovery, CDS markets play a leading role in five out of seven countries. Therefore, equity investors should span the CDS market for incremental information. The stock market has a feedback effect for two countries and dominates price discovery for only one country.

This research aims to model the relationship between the credit risk signals in the credit default swap (CDS) market and agency credit ratings, and determines the factors that help explain the variation in such signals.

A comprehensive analysis of the differences in the relative credit risk assessments of CDS-based risk signals and agency ratings is provided. It is shown that the divergence between credit risk signals in the CDS market and agency ratings is explained by factors which the rating agencies may consider differently than credit market participants.

The results suggest that agency credit ratings of relative riskiness of a reference entity do not always correspond with assessments by CDS spreads, as the price of risk is a function of additional macro and micro factors that can be explained using statistical analysis.

This research is unique in modeling the relationship between the credit risk assessments of the CDS market and the agency ratings, which to the best of the authors' knowledge has not been analyzed before in terms of their agreement and the level of discrepancy between them. This model can be used by investors in debt instruments that are not explicitly CDSs or which have illiquid CDS contracts, to replicate market-based, point-in-time credit risk signals. Based on both market-based and firm-specific factors in this model, the results can be used to augment through-the-cycle credit risk assessments, analyze issues surrounding the pricing of CDSs and examine the policies of credit rating agencies.

We set out, in this paper, to extend the Das and Sundaram (2000) model as a means of simultaneously considering correlated default risk structure and counter-party risk. The multinomial model established by Kamrad and Ritchken (1991) is subsequently modified in order to facilitate the development of a computational algorithm for valuing two types of active credit derivatives, credit-spread options and default baskets. From our numerical examples, we find that along with the correlated default risk, the existence of counter-party risk results in a substantially lower valuation of credit derivatives. In addition, we find that different settings of the term structure of interest rate volatility also have a significant impact on the value of credit derivatives.

This commentary discusses issues related to the important task of separating the spreads of fixed income securities into various components, related to liquidity, credit, and the duration and convexity of cashflows. This treatment is intended to provide intuition and a general framework for thinking about spread dynamics, rather than a mathematically rigorous treatment of the topic. In addition to being an introduction for those who are unfamiliar with the fundamentals of the market dynamics of spreads, the article also serves as a commentary and reminder to those practitioners with more experience in the analysis of spreads.