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Determinants of Interest rate swap spreads: A quantile regression approach

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Abstract

This paper analyzes whether the determinants of interest rate swap spreads are homogenous along quantiles of conditional interest rate swap spreads. Our empirical results suggest quantile parameter heterogeneity within and between the long-term (10-year) and short-term (2-year) spreads. The effect of default and ted on both 10- and 2-year interest rate swap spreads increases across quantiles; the default and ted effects increase at a decreasing rate (concave down) and increasing rate (concave up), respectively. The effect of slope and volatility on 10-year interest rate swap spreads is low at the middle quantile (U-shape), whereas the effect of slope and volatility on 2-year interest rate swaps is high at the middle quantile (inverted U-shape). Additionally, using the coefficient equality test, we find that in most cases, the estimated coefficients at both the lower and the higher quantiles are significantly different from the median coefficient.

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Notes

  1. See, for example, Brown, Harlow, and Smith (1994) and Nielsen and Ronn (1996).

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Correspondence to Kenneth A. Tah.

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Tah, K.A. Determinants of Interest rate swap spreads: A quantile regression approach. J Econ Finan 46, 522–534 (2022). https://doi.org/10.1007/s12197-022-09574-y

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