An Empirical Examination of U.S. Dollar Swap Spreads

Posted: 23 Jul 1999

See all articles by Bernadette A. Minton

Bernadette A. Minton

Ohio State University (OSU) - Department of Finance

Date Written: September 1994


The structure of a plain vanilla interest rate swap is such that its cash flows can be replicated by a portfolio of two bonds or by a portfolio of short-term interest rate futures contracts. Swap pricing, therefore, should be closely related to the pricing of these underlying instruments. This paper estimates the determinants of U.S. dollar swap spreads to test whether the pricing relationships between swaps, bonds and futures hold. Swap spreads are positively related to interest rate volatility and the corporate quality spread, and negatively related to the term spread and level of the interest rate. Short-term over-the-counter swap rates are highly correlated with swap rates calculated using Eurodollar futures prices. While exchange-traded implied swap spreads are statistically related to yield curve factors, they are not related to corporate quality spreads. Overall, the results in this paper suggest that swaps are not equivalent to portfolios of bonds or futures contracts due in part to the differences in the credit risk in each instrument.

JEL Classification: G10

Suggested Citation

Minton, Bernadette A., An Empirical Examination of U.S. Dollar Swap Spreads (September 1994). Available at SSRN:

Bernadette A. Minton (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

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