Negative Swap Spreads and Limited Arbitrage
Since October 2008, fixed rates for interest rate swaps with a 30-year maturity have been mostly below Treasury rates with the same maturity. Under standard assumptions, this implies the existence of arbitrage opportunities. This paper presents a model for pricing interest rate swaps, where friction...
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| Veröffentlicht in: | The Review of financial studies 2020-01, Vol.33 (1), p.212-238 |
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| container_title | The Review of financial studies |
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| creator | Jermann, Urban J. |
| description | Since October 2008, fixed rates for interest rate swaps with a 30-year maturity have been mostly below Treasury rates with the same maturity. Under standard assumptions, this implies the existence of arbitrage opportunities. This paper presents a model for pricing interest rate swaps, where frictions for holding bonds limit arbitrage. I analytically show that negative swap spreads should not be surprising. In the calibrated model, swap spreads can reasonably match empirical counterparts without the need for large demand imbalances in the swap market. Empirical evidence is consistent with the relation between term spreads and swap spreads in the model. |
| doi_str_mv | 10.1093/rfs/hhz030 |
| format | Article |
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| identifier | ISSN: 0893-9454 |
| ispartof | The Review of financial studies, 2020-01, Vol.33 (1), p.212-238 |
| issn | 0893-9454 1465-7368 |
| language | eng |
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| source | EBSCOhost Business Source Complete; JSTOR Archive Collection A-Z Listing; Oxford University Press Journals All Titles (1996-Current) |
| subjects | Arbitrage Kapitalmarkttheorie Swap Unvollkommener Markt Zins |
| title | Negative Swap Spreads and Limited Arbitrage |
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