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SSRN Electronic Journal
Article . 2004 . Peer-reviewed
Data sources: Crossref
EconStor
Research . 2004
Data sources: EconStor
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Trading Risk and Volatility in Interest Rate Swap Spreads

Authors: John Kambhu;

Trading Risk and Volatility in Interest Rate Swap Spreads

Abstract

This paper examines how risk in trading activity can affect the volatility of asset prices. We look for this relationship in the behavior of interest rate swap spreads and in the volume and interest rates of repurchase contracts. Specifically, we focus on convergence trading, in which speculators take positions on a bet that asset prices will converge to normal levels. We investigate how the risks in convergence trading can affect price volatility in a form of positive feedback that can amplify shocks in asset prices. In our analysis, we see empirical evidence of both stabilizing and destabilizing forces in the behavior of interest rate swap spreads that can be attributed to speculative trading activity. We find that the swap spread tends to converge to a long-run level, although trading risk can sometimes cause the spread to diverge from that level.

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Keywords

ddc:330, G24, G14, Wertpapierhandel, Risk ; Swaps (Finance) ; Repurchase agreements ; Asset pricing, interest rate swaps, trading risk, Volatilität, Pensionsgeschäft, repurchase contracts, volatility of asset prices, Risiko, Zinsswap, convergence trading, G12, swap spread, USA, Schätzung

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citations
This is an alternative to the "Influence" indicator, which also reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Citations provided by BIP!
popularity
This indicator reflects the "current" impact/attention (the "hype") of an article in the research community at large, based on the underlying citation network.
BIP!Popularity provided by BIP!
influence
This indicator reflects the overall/total impact of an article in the research community at large, based on the underlying citation network (diachronically).
BIP!Influence provided by BIP!
impulse
This indicator reflects the initial momentum of an article directly after its publication, based on the underlying citation network.
BIP!Impulse provided by BIP!
1
Average
Average
Average
bronze