TY  - JOUR
AU  - Liu,Jun
AU  - Longstaff,Francis A.
AU  - Mandell,Ravit E.
TI  - The Market Price of Credit Risk: An Empirical Analysis of Interest Rate Swap Spreads
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8990
PY  - 2002
Y2  - June 2002
UR  - http://www.nber.org/papers/w8990
L1  - http://www.nber.org/papers/w8990.pdf
N1  - Author contact info:
Jun Liu
Rady School of Management
UCSD
Pepper Canyon Hall Room 320
9500 Gilman Dr MC 0093
La Jolla CA 92093
Tel: 310/825-4083
E-Mail: junliu@ucsd.edu

Francis Longstaff
UCLA
Anderson Graduate School of Management
110 Westwood Plaza, Box 951481
Los Angeles, CA  90095-1481
Tel: 310/825-2218
Fax: 310/206-5455
E-Mail: francis.longstaff@anderson.ucla.edu
AB  - This paper studies the market price of credit risk incorporated into one of the most important credit spreads in the financial markets: interest rate swap spreads. Our approach consists of jointly modeling the swap and Treasury term structures using a general five-factor affine credit framework and estimating the parameters by maximum likelihood. We solve for the implied special financing rate for Treasury bonds and find that the liquidity component of on-the-run bond prices can be significant. We also find that credit premia in swap spreads are positive on average. These premia, however, vary significantly over time and were actually negative for much of the 1990s.
ER  -