Publications
Publications
- April 2024
- Journal of Financial Economics
Demand-and-Supply Imbalance Risk and Long-Term Swap Spreads
By: Samuel G. Hanson, Aytek Malkhozov and Gyuri Venter
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
Citation
Hanson, Samuel G., Aytek Malkhozov, and Gyuri Venter. "Demand-and-Supply Imbalance Risk and Long-Term Swap Spreads." Art. 103814. Journal of Financial Economics 154 (April 2024).