Credit Risk and the Yen Interest Rate Swap Market

43 Pages Posted: 7 Nov 2008

See all articles by Young Ho Eom

Young Ho Eom

Yonsei University

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business

Jun Uno

Waseda University

Multiple version iconThere are 4 versions of this paper

Date Written: July 2000


In this paper, we investigate the pricing of Japanese yen interest rate swaps during the period 1990-96. We obtain measures of the spreads of the swap rates over comparable Japanese Government Bonds (JGBs) for different maturities and analyze the relationship between the swap spreads and credit risk variables. Our empirical results in the yen swap market indicate that: 1) the commonly-used assumption of lognormal default-free interest rates and swap spreads is strongly rejected by the data, 2) the term structure of swap spreads displays a humped-shape, and 3) the shocks in the yen swap spread are negatively correlated with the shocks in the comparable default-free spot rates, especially for longer maturities. Our analysis also indicates that yen swap spreads behaved very differently from the credit spreads on Japanese corporate bonds in the early nineties. In contrast to Japanese corporate bonds, we find that the yen swap spread is also significantly related to proxies for the long-term credit risk factor. Furthermore, the swap spread is negatively related to the level and slope of the term structure and positively related to the curvature, indicating that the credit "optionality" is priced in the swap rate. Thus, overall, the yen swap market was sensitive to credit risk during the period of our study.

Keywords: Credit Risk, Japanese Government Bonds Market, Swap Pricing

Suggested Citation

Eom, Young Ho and Subrahmanyam, Marti G. and Uno, Jun, Credit Risk and the Yen Interest Rate Swap Market (July 2000). NYU Working Paper No. S-DRP-01-08, Available at SSRN:

Young Ho Eom (Contact Author)

Yonsei University ( email )

College of Business and Economics
Seoul 120-749
South Korea
+82 2 361 4193 (Phone)
+82 2 392 0504 (Fax)

Marti G. Subrahmanyam

New York University (NYU) - Leonard N. Stern School of Business ( email )

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Suite 9-160
New York, NY NY 10012
United States

Jun Uno

Waseda University ( email )

1-6-1 Nishi-Waseda
Tokyo, 1698050

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