An Empirical Analysis of Pricing in the Japanese Bond Markets

32 Pages Posted: 25 Aug 2011 Last revised: 6 Dec 2011

See all articles by Toyoharu Takahashi

Toyoharu Takahashi

Faculty of Commerce, Chuo University; Crawford School of Public Policy, ANU

Date Written: August 22, 2011


Both in the theoretical and applied literature of finance the difference in yield-to-maturity between corporate bonds and government bonds has been used as a measure of the risk of the former over the latter. While this approach has sometimes provided interesting results, the usefulness of yield spreads is lessened by ignoring the term structure of interest rate.

This paper presents an alternative measure, “Asset swap spread”, use asset swaps to convert fixed income cash flows to floaters which refer LIBOR plus spread as index coupon rate. This spreads show much broader characteristics as well as riskiness of each corporate and government bonds. Effectively by using the swap curve to create a set of equal and opposite fixed-rate cash flows, we create a synthetic floating rate note (FRN) with an index coupon rate. Moreover, this value is now being captured through the trading of bond asset swap packages.

Based on these ideas, we provide an introduction to government and corporate bond asset swaps, explaining their basic mechanics, the use of asset swap spreads in identifying and capturing relative value is discussed and the market drivers of asset swaps spreads are examined.

Keywords: fixed income, asset swap spread, Japanese bond markets

JEL Classification: G12, G13

Suggested Citation

Takahashi, Toyoharu, An Empirical Analysis of Pricing in the Japanese Bond Markets (August 22, 2011). 24th Australasian Finance and Banking Conference 2011 Paper. Available at SSRN: or

Toyoharu Takahashi (Contact Author)

Faculty of Commerce, Chuo University ( email )

742-1, Higashinakano
Tokyo, 192-0393


Crawford School of Public Policy, ANU ( email )

ANU College of Asia and the Pacific
J.G. Crawford Building, #132, Lennox Crossing
Canberra, Australian Capital Territory 0200

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