Fixed Income Relative Value Analysis: A Practitioners Guide to the Theory, Tools, and Trades

Chapter 9

Swap Spreads from an Empirical Perspective

To this point in the book, our discussion of swap spreads and LIBOR–repo spreads has been largely conceptual. In this chapter, we consider swap spreads from an empirical perspective. In particular, we’re looking for relations among variables that would help support or perhaps refute the conceptual framework for modeling swap spreads presented in the previous chapter.

Empirical Analysis of Swap Spreads

In the previous chapter, we used no-arbitrage principles to conclude that the swap spreads should be equal to LIBOR–repo basis swap spreads. Since there is no liquid market for LIBOR–repo basis swaps, we used basic results of financial economics to characterize the observable factors on which ...