The Dynamics of Sovereign Yields Over Swap Rates in the Eurozone Market

46 Pages Posted: 19 Oct 2020

See all articles by Lior David-Pur

Lior David-Pur

Ben-Gurion University of the Negev

Koresh Galil

Ben-Gurion University of the Negev - Department of Economics

Mosi Rosenboim

Ben-Gurion University of the Negev

Date Written: July 1, 2020

Abstract

We explore the dynamics of the adjusted swap spread (calculated as the difference between the swap rate and sovereign yields over the credit default swap premium) in the Eurozone market by studying three markets simultaneously: 1) sovereign bonds, 2) credit default swaps (CDS), and 3) swap rates. We find a strong relationship between the markets. Specifically, based on the no-arbitrage argument, we show that the difference between the Euribor and Repo rates is a key driver of the adjusted swap spread. However, illiquidity premiums and systemic risk also play an essential role in times of economic stress and for less creditworthy countries. The findings also shed light on the recent negative swap spreads puzzle in the United States.

Keywords: Swap market; Eurozone sovereign bond market; Swap spread; Euribor Repo spread

JEL Classification: G12, G13, G15

Suggested Citation

David-Pur, Lior and Galil, Koresh and Rosenboim, Mosi, The Dynamics of Sovereign Yields Over Swap Rates in the Eurozone Market (July 1, 2020). Available at SSRN: https://ssrn.com/abstract=3683744 or http://dx.doi.org/10.2139/ssrn.3683744

Lior David-Pur

Ben-Gurion University of the Negev ( email )

1 Ben-Gurion Blvd
Beer-Sheba 84105, 84105
Israel

Koresh Galil (Contact Author)

Ben-Gurion University of the Negev - Department of Economics ( email )

Beer-Sheva 84105
Israel
+972-8-6472310 (Phone)

Mosi Rosenboim

Ben-Gurion University of the Negev ( email )

1 Ben-Gurion Blvd
Beer-Sheva, 84105
Israel

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