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  • 2022
  • Working Paper

Demand-and-Supply Imbalance Risk and Long-Term Swap Spreads

By: Samuel G. Hanson, Aytek Malkhozov and Gyuri Venter
  • Format:Print
  • | Language:English
  • | Pages:77
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Abstract

We develop and test a model in which swap spreads are determined by end users' demand for and constrained intermediaries' supply of long-term interest rate swaps. Swap spreads reflect compensation both for using scarce intermediary capital and for bearing convergence risk—i.e., the risk spreads will widen due to a future demand-and-supply imbalance. We show that a proxy for the intermediated quantity of swaps—dealers' net position in Treasuries—flipped sign during the Global Financial Crisis when swap spreads turned negative and that this variable predicts the excess returns on swap spread trades. Exploiting our model's sign restrictions, we identify shifts in demand and supply and find that both contribute significantly to the volatility of swap spreads.

Keywords

Swap Spreads; Risk and Uncertainty; Interest Rates; Financial Crisis; Financial Markets

Citation

Hanson, Samuel G., Aytek Malkhozov, and Gyuri Venter. "Demand-and-Supply Imbalance Risk and Long-Term Swap Spreads." Working Paper, December 2022.
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About The Author

Samuel G. Hanson

Finance
→More Publications

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  • The Impact Developers Fund By: Malcolm Baker, Samuel Gregory Hanson, Jonathan Wallen and Zach Komes
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