The Effects Of Default Risk And Liquidity Premium On Swap Spread

As the world's largest interest rate derivatives,Interest rate swap has developed for ten years in China.And in the past ten years the economic of China have a restructure change and upgrade,interest rate swap market has also had some changes.Interest rate swap spread is the quotation method of interest rate swap,and many studies are focus on the factors that affect interest rate swap spread.In this paper we focus on the two main factors that affect swap spread:Default risk and liquidity premium,in the period of economy transition,there may be structural changes in the impact of default risk and liquidity premium on swap spreads.The study of traditional structural changes is a structure mutation,jumping from one state to another state.But in this paper we use smooth structural changes via nonparametric regression to study the impact of default risk and liquidity premium on swap spreads,emphasizing the slowly change in structure.This paper mainly studies the influencing factors and structural changes of swap spreads.Firstly,it analyzes the influencing factors of the swap spreads.Secondly,it analyzes the present situation and reasons of the structural changes of the swap spreads.Finally,it analyzes the dynamic relationship between the swap spreads and the main influencing factors-default risk,liquidity premium,and then draw the conclusion.This paper is divided into four parts.In the first part we introduces the research about swap spreads and summarizes the existing researches,and then compars the different models about dealing with the structural problems,finding that the smooth structure change model is more suitable for the the current economic environment in China.The second part is the analysis of influencing factors of swap spreads,explaining the default risk and liquidity premium and other factors how to effect swap spreads,and through the empirical test draw the conclusion that the default risk and liquidity premium has a significant impact on swap spreads.The third part is mainly analyse swap spreads structural changes in the economy transition environment.From the current situation of swap spreads analyse and Bai-Perron test to show that there exists structural changes in swap spreads and illustrates the reason for it.In the fourth part,we first propose the hypothesis of the time-varying characteristics of the default risk and the liquidity premium.Then we uses smooth structural changes via nonparametric regression to analyses the impact of default risk and liquidity premium on swap spreads.Finally find that in daily trading,the effects of default risk and liquidity premium on swap spreads have structural changes,but there is no structural change in monthly trading.For the 1 year swap contract,swap spreads can reflect the default risk and liquidity premium changes no matter in daily or monthly transactions.And this is consistent with the traditional theory.But for the 5 year swap contract,due to the specific market participants and special restrictions on the issues of AAA rated bond,daily trading mainly considers liuquidity premium and ignores default risk,but monthly trading mainly considers default risk and ignore liquidity risk.