The Market Price of Credit Risk: An Empirical Analysis of Interest Rate Swap Spreads / Jun Liu, Francis A. Longstaff, Ravit E. Mandell.

Format:

Book

Author/Creator:

Liu, Jun.

Contributor:

National Bureau of Economic Research.

Longstaff, Francis A.

Mandell, Ravit E.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8990.

NBER working paper series no. w8990

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

The Market Price of Credit Risk

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2002.

Summary:

This paper studies the market price of credit risk incorporated into one of the most important credit spreads in the financial markets: interest rate swap spreads. Our approach consists of jointly modeling the swap and Treasury term structures using a general five-factor affine credit framework and estimating the parameters by maximum likelihood. We solve for the implied special financing rate for Treasury bonds and find that the liquidity component of on-the-run bond prices can be significant. We also find that credit premia in swap spreads are positive on average. These premia, however, vary significantly over time and were actually negative for much of the 1990s.

Notes:

Print version record

June 2002.