An Econometric Model of the Term Structure of Interest-Rate Swap Yields

J. OF FINANCE, Vol. 52 No. 4, September 1997

Posted: 22 Oct 1997

See all articles by Darrell Duffie

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Canadian Derivatives Institute

Kenneth J. Singleton

Stanford University - Graduate School of Business

Abstract

This paper develops a multi-factor econometric model of the term structure of interest-rate swap yields. The model accommodates the possibility of counterparty default and any differences in the liquidities of the Treasury and Swap markets. By parameterizing a model of swap rates directly, we are able to compute model-based estimates of the defaultable zero coupon bond rates implicit in the swap market without having to specify a priori the dependence of these rates on default hazard or recovery rates. The time series analysis of spreads between zero-coupon swap and treasury yields reveals that both credit and liquidity factors were important sources of variation in swap spreads over the past decade.

JEL Classification: G12, G13, E43

Suggested Citation

Duffie, James Darrell and Singleton, Kenneth J., An Econometric Model of the Term Structure of Interest-Rate Swap Yields. J. OF FINANCE, Vol. 52 No. 4, September 1997, Available at SSRN: https://ssrn.com/abstract=11214

James Darrell Duffie

Stanford University - Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Canadian Derivatives Institute ( email )

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Kenneth J. Singleton (Contact Author)

Stanford University - Graduate School of Business ( email )

Knight Management Center
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Stanford, CA 94305-7298
United States
650-723-5753 (Phone)

HOME PAGE: http://www.stanford.edu/~kenneths

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