Components of the Bid-Ask Spread of Default-Risky Interest Rate Swaps

Posted: 12 May 2000

See all articles by Robert Brooks

Robert Brooks

University of Alabama - Department of Economics, Finance and Legal Studies

Davinder K. Malhotra

Thomas Jefferson University

Abstract

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

Suggested Citation

Brooks, Robert E. and Malhotra, Davinder K., Components of the Bid-Ask Spread of Default-Risky Interest Rate Swaps. ADVANCES IN FUTURES AND OPTIONS RESEARCH, Volume 7, 1994. Available at SSRN: https://ssrn.com/abstract=6023

Robert E. Brooks (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
205-348-8987 (Phone)
205-348-0590 (Fax)

HOME PAGE: http://www.frmhelp.com

Davinder K. Malhotra

Thomas Jefferson University ( email )

Schoolhouse Lane and Henry Avenue
School of Business Administration
Philadelphia, PA 19144
United States

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