Working Paper Series no. 65: Modelling the Swap Spread

Abstract

Swaps are one of the major innovations of the 80s but there are little empirical studies on interest rates swaps (IRS), especially on US and European markets. To understand how swap pricing works, we estimate IRS valuation models for the US, German and French swap markets. On one hand, we derive swap rate from the market value of the swap contract formula. On the other hand, questioning the role of default credit risk in valuing the swap contract, we show that the swap rate can be expressed as a function of corporate bond rate and default risk indicators; the empirical analysis indicates some elements of validity for both approaches.

Sanvi Avouyi-Dovi and Eric Jondeau
June 1999

Classification JEL : C12, C32

Keywords : Swap market, Interest rate swaps, Swap valuation