Components of the Bid-Ask Spread of Default-Risky Interest Rate Swaps
Posted: 12 May 2000
In this paper, we develop a model for pricing default-risky interest rate swaps in a partial equilibrium framework by treating them as an exchange of two hypothetical securities. We provide an empirical look at the various factors that make up the bid-ask rates quoted by the swap dealers. We find that the bid-ask rates have declined over time. The Treasury rate, maturity of the swap contract, maturity of the floating rate index, and transactions costs are significant determinants of the bid-ask rates in a swap contract.
JEL Classification: E43
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