What Determines the Yen Swap Spread?

Posted: 11 Apr 2015

Date Written: 2015

Abstract

We investigate if Japanese yen denominated interest rate swap spreads price risks in addition to liquidity and default risk. These additional risks include: the time-varying correlation between interest rates of different types and maturities; business cycle risk; and market skewness risk. Our analysis, over a number of different maturities and sample periods, supports the existence of an additional risk premium. We also show that the time-varying correlation between short term market interest rates (e.g., TIBOR) and the longer term Government bond yield (e.g., Gensaki) is of particular importance. Japanese yen swap spreads are shown to contain both pro-cyclical and counter-cyclical elements of business cycle risk, positive risk premia for skewness risk and variable risk premia for correlation risk (between fixed and floating interest rates).

Keywords: Correlation risk; Business cycles; Interest rate swaps; Market skewness; Swap spread puzzle; Systematic risk; Japan; Yen swap markets

JEL Classification: C22, C51, G12, G15

Suggested Citation

Azad, A. S. M. Sohel and Batten, Jonathan A. and Fang, Victor, What Determines the Yen Swap Spread? (2015). International Review of Financial Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2592945

A. S. M. Sohel Azad (Contact Author)

Deakin University ( email )

221 Burwood Highway
Burwood
Melbourne, Victoria 3125
Australia

Jonathan A. Batten

RMIT University ( email )

Level 12, 239 Bourke Street
Melbourne, Victoria
Australia

HOME PAGE: http://https://www.rmit.edu.au/contact/staff-contacts/academic-staff/b/batten-professor-jonathan

Victor Fang

Deakin University ( email )

School of Acc Economics Finance
Burwood Highway
Burwood, Victoria 3215
Australia
92446919 (Phone)

HOME PAGE: http://www.deakin.edu.au

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