Title: The effects of volatility spillover in the US basis swap markets

Authors: Vivek Bhargava; D.K. Malhotra

Addresses: Graduate Business Programs, Alcorn State University, 9 Campus Drive, Natchez, MS, USA. ' School of Business Administration, Philadelphia University, School House Lane and Henry Avenue, Philadelphia, PA 19144-5497, USA

Abstract: This paper examines time series properties of the swap spreads in three segments of the US dollar interest rate swaps market. Specifically, the relationship between the swap spreads in US dollar fixed-for-floating Interest Rate Swaps (IRS), Treasury bill versus LIBOR basis swaps and commercial paper versus LIBOR basis swaps are analysed. Tests for evidence of volatility spillover among these segments are conducted. Variations of several models, including VAR/VECM, GARCH (1, 1) EGARCH and GJR-GARCH are used in this study. Evidence of interdependencies and volatility spillover is found between these markets. Using the GJR-GARCH model, it is found that the spillover is asymmetric.

Keywords: volatility spillover; basis swap markets; swap spreads; USA; United States; dollar interest rate swaps.

DOI: 10.1504/IJFSM.2012.046949

International Journal of Financial Services Management, 2012 Vol.5 No.3, pp.216 - 238

Published online: 15 May 2012 *

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