Determinants of New Taiwan Dollar Interest Rate Swap Spreads

Posted: 8 May 2012

See all articles by Ralph Lu

Ralph Lu

Ming Chuan University - Department of Finance

Yu-Chun Wang

affiliation not provided to SSRN

Hsiu-Chuan Lee

Ming Chuan University

Date Written: February 10, 2012

Abstract

This study examines the determinants of New Taiwan Dollar interest rate swap (NTD IRS) spreads. Prior literature provides evidence that the term structure of interest rates, liquidity, and credit risk comprise the swap spreads. The term structure of interest rates includes the interest rate level, the slope of the yield curve, and the interest rate volatility. The empirical results for the full sample period show that the interest rate level, the slope of the yield curve, interest rate volatility, liquidity risk, and credit risk are all important factors affecting the swap spreads. Results of the variance decomposition for the full sample period indicate that default risk is the most important factor among the five components. Furthermore, the results show that the explanatory power of the regression model for the term structure of interest rates, liquidity, and credit risk is higher in a bear market than in a bull market. Finally, the results of variance decomposition indicate that default risk plays a more important role than other factors in a bear market, but the key factor varies with the maturities of swap contracts in a bull market.

Keywords: Swap spreads, Term structure of interest rates, Liquidity risk, Credit risk, Market conditions

JEL Classification: G10, G15

Suggested Citation

Lu, Ralph Yang-Cheng and Wang, Yu-Chun and Lee, Hsiu-Chuan, Determinants of New Taiwan Dollar Interest Rate Swap Spreads (February 10, 2012). Journal of Financial Studies, 2013, Available at SSRN: https://ssrn.com/abstract=2054692

Ralph Yang-Cheng Lu

Ming Chuan University - Department of Finance ( email )

Taiwan

Yu-Chun Wang

affiliation not provided to SSRN ( email )

Hsiu-Chuan Lee (Contact Author)

Ming Chuan University ( email )

No. 250, Section 5
Zhongshan North Road
Taipei, 111
Taiwan
886-2-2882-4564 ext 2188 (Phone)
Fax: 886-2-2880-9796 (Fax)

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