An Empirical Analysis of US Interest Rate Swap Spreads during the Sovereign Crisis of the Euro Zone

This paper analyzes US interest rate swap spreads in relation to the sovereign crisis of the Euro zone. The results reveal that swap spreads of 5and 10-years incorporate default risk positively in accordance with the theory. According to Ito (2010) which analyzed the period of global financial crisis stemming from subprime loan problem in the US, the default risk is negatively incorporated in the period of financial crisis stemming from US sub-prime loan. This is mainly due to the difference of magnitude of the two crises. The impact of the sovereign crisis of the Euro zone was not as great as the previous crisis. On the other hand, the impacts of slope, TED spread, and volatility are similar to Ito (2010). Steeper yield curve causes narrower swap spreads in swap spreads of 2and 10-year. When liquidity gets tighter in money market, swap spreads of 2and 5-year get wider. The size of impact is larger in 2-year swap spread. Higher volatility causes the widening of swap spreads in 5and 10year. This is mainly because the market participants were uncertain as for the future of monetary policy by the FRB.