Abstract

https://ssrn.com/abstract=2814975
 


 



An Explanation of Negative Swap Spreads: Demand for Duration from Underfunded Pension Plans


Sven Klingler


Copenhagen Business School

Suresh M. Sundaresan


Columbia Business School - Finance and Economics

October 4, 2016


Abstract:     
The 30-year US swap spreads have been negative since September 2008. We offer an explanation for this persistent anomaly. Through a model, we show that the demand for swaps arising from duration hedging needs of underfunded pension plans, coupled with balance sheet constraints of swap dealers, can drive swap spreads to become negative. We construct an empirical measure of the aggregate funding status of Defined Benefits (DB) pension plans from the Federal Reserve's financial accounts of the United States and show that this measure is a significant explanatory variable of 30-year swap spreads, but not for swaps with shorter maturities.

Number of Pages in PDF File: 56

Keywords: Pension funds, liability-driven investment, swap spreads, pension protection act, swap rates, limits of arbitrage

JEL Classification: G11, G12, G13, G22, G23


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Date posted: July 28, 2016 ; Last revised: October 5, 2016

Suggested Citation

Klingler, Sven and Sundaresan, Suresh M., An Explanation of Negative Swap Spreads: Demand for Duration from Underfunded Pension Plans (October 4, 2016). Available at SSRN: https://ssrn.com/abstract=2814975

Contact Information

Sven Klingler (Contact Author)
Copenhagen Business School ( email )
Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
Suresh M. Sundaresan
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States
212-854-4423 (Phone)
212-316-9180 (Fax)
HOME PAGE: http://www0.gsb.columbia.edu/faculty/ssundaresan/

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