The Market Price of Credit Risk: An Empirical Analysis of Interest Rate Swap Spreads

38 Pages Posted: 13 Jun 2002 Last revised: 27 Oct 2010

See all articles by Jun Liu

Jun Liu

University of California, San Diego (UCSD) - Rady School of Management

Francis A. Longstaff

University of California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER)

Ravit E. Mandell

Salomon Smith Barney, Inc., U.S.

Multiple version iconThere are 2 versions of this paper

Date Written: June 2002

Abstract

This paper studies the market price of credit risk incorporated into one of the most important credit spreads in the financial markets: interest rate swap spreads. Our approach consists of jointly modeling the swap and Treasury term structures using a general five-factor affine credit framework and estimating the parameters by maximum likelihood. We solve for the implied special financing rate for Treasury bonds and find that the liquidity component of on-the-run bond prices can be significant. We also find that credit premia in swap spreads are positive on average. These premia, however, vary significantly over time and were actually negative for much of the 1990s.

Suggested Citation

Liu, Jun and Longstaff, Francis A. and Mandell, Ravit E., The Market Price of Credit Risk: An Empirical Analysis of Interest Rate Swap Spreads (June 2002). NBER Working Paper No. w8990. Available at SSRN: https://ssrn.com/abstract=315987

Jun Liu

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States
858.534.2022 (Phone)
5858.534.0745 (Fax)

Francis A. Longstaff (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-2218 (Phone)
310-206-5455 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ravit E. Mandell

Salomon Smith Barney, Inc., U.S.

New York, NY 10013
United States

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