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Credit, liquidity and market risk in the term structure of swaps in pesetas
Pilar Abad Romero |
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Some characteristics of the term structure in interest rate swap (IRS) markets are influenced by the idiosyncrasy of this financial instrument itself, which might explain the rejection of the Expectations Hypothesis in the formation of interest rates. After testing and rejecting the Expectations Hypothesis, we present evidence supporting the existence of significant time-varying premia. We then focus on characterizing some properties of realized ex-post premia, and provide explanatory variables for these premia. We pay particular attention to the extent to which the levels of market risk, default risk and liquidity risk explain the time evolution of risk premia at different maturities.
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